Karaoke Machines and Seasoned Seaweed as Innovative Businesses?... Ultimately 'Reorganized' Large Corporation Ventures [The Trap of Overexpansion]

①The Final Overexpansion of Kakao and LF
Mass Liquidation of Unrelated Affiliates Underway
Kakao: Karaoke Equipment, English Academies
LF: Seasoned Seaweed Business, Naver: Insurance Business, etc.

Editor's NoteAs the number of subsidiaries under major domestic conglomerates has increased by nearly 1,000 over the past five years, concerns over the profitability and financial soundness of large corporations' affiliates have intensified, especially since last year with the severe controversy over Kakao's sprawling expansion. Globally, there is growing caution as many large corporations have either been split up or collapsed entirely due to indiscriminate sprawling expansions. We examined the actual state of conglomerates' sprawling expansions amid the tension between entering new industries and the controversy over overexpansion.

The large-scale liquidation, restructuring, and merger details revealed in the 2023 business reports released by conglomerates last month prove that the diversification strategy, which had been the cornerstone of conglomerate growth, is no longer viable. There are even concerns that reckless business expansion and poor management could ultimately hinder the growth of a company's core business.

Liquidation of Karaoke Company Acquired Along with SM Entertainment by Kakao

Remote control for karaoke machines produced by Everything Korea. [Image source=Junggonara]

According to Kakao's business report on the 20th, seven companies were removed from the list of affiliates in the first quarter of this year (January to March). Everysing Korea, a karaoke equipment manufacturer, was excluded from the affiliates following a bankruptcy ruling on February 15. This company was one of the firms that joined Kakao's affiliates when Kakao acquired SM Entertainment last year.

During the acquisition of SM Entertainment, Kakao failed to dispose of underperforming affiliates and took them on together. Everysing Korea is a representative example, having been evaluated as a struggling company even before joining Kakao's affiliates. The company originated as Bravo Music, a karaoke equipment manufacturer established within SM Entertainment in 2000. It changed its name to Everysing Korea in 2017. Entering the karaoke equipment manufacturing and smartphone karaoke application sectors as a latecomer, it was unable to generate significant profits due to competition with established leaders like Kumyoung and Taejin. SM Entertainment had not yet disposed of this affiliate, and Kakao only recently faced its bankruptcy ruling.

List of subsidiaries separated from Kakao in the first quarter of this year. [Image source=Financial Supervisory Service Electronic Disclosure System]

On the 19th of last month, Onyx K and Neuron English, also removed from the affiliates, were cited as representative subsidiaries that hindered Kakao's growth. Onyx K, established in 2011, is a real estate management company that once managed the K Cube Tower building owned by Kim Beom-su, Kakao's Management Innovation Committee Chairman, and operated the in-house caf?, Cafe Talk. Neuron English is an English academy located in Bangi-dong, Songpa-gu, Seoul.

Since these companies were owned by Chairman Kim and his younger brother Kim Hwa-young, they became embroiled in allegations of favoritism. Regardless of Kakao's business or profitability, these companies were included as affiliates solely due to the interests of Chairman Kim and his close associates. These companies failed to produce proper results and were eventually liquidated, which critics argue only increased the financial burden on the parent company.

Haewoochon, a Capital-Deficit Seasoned Seaweed Company Taken Over by LF Food

Haewoochon, a seasoned seaweed manufacturer, was used to strengthen the controlling power of LF Group's major shareholder, whose main business is fashion. Taein Susan, a company 100% owned by LF Group Chairman Koo Bon-geol, acquired and merged Haewoochon, which was undergoing rehabilitation due to financial deterioration in 2018. At that time, Haewoochon's liquidation value was about 2.3 billion KRW, but Taein Susan acquired it for nearly double that price, 4.2 billion KRW.

After the merger, Taein Susan and Haewoochon unified their names under Haewoochon. Subsequently, without efforts to improve financial structure or growth potential, Haewoochon remained in a capital deficit state while purchasing more shares of LF Group through loans supported by Chairman Koo, thereby being used to strengthen the major shareholder's control. Haewoochon held 463,664 shares (1.59%) of LF, and Chairman Koo was able to further strengthen LF's control through Haewoochon along with his existing 19.11% stake.

In April last year, Haewoochon was split by a physical division into the surviving company HWC and the newly established Haewoochon, which then came under LF Food. LF's 2023 business report disclosed that Haewoochon was in a capital deficit state when it was transferred to LF Food in April last year. Through this, HWC escaped the capital deficit state. Chairman Koo strengthened group control through LF shares held by HWC while offloading the struggling seasoned seaweed business to LF Food.

Naver NF Insurance Closed After Drifting for Three Years

Naver Headquarters in Seongnam, Gyeonggi. Photo by Jinhyung Kang aymsdream@

Naver's NF Insurance Service (hereafter NF Insurance) is a case where the business was prepared for three years but never properly opened and eventually closed. It was revealed in Naver's 2023 business report that NF Insurance was officially liquidated on March 15 last year.

NF Insurance was established in July 2020 to handle Naver Financial's insurance business. At the time of establishment, there were high expectations for profitability as financial authorities were expected to allow electronic financial companies to obtain corporate insurance agency (GA) licenses. However, as the financial authorities' stance did not change, the company remained in a state of suspended operation for several years, accumulating net losses of 99.14 million KRW in 2020, 153.86 million KRW in 2021, and 27.94 million KRW in 2022, before finally being liquidated.

Naver had opportunities to exit NF Insurance early. Although Naver consistently considered liquidating NF Insurance, it missed the chance due to an internal decision to wait for potential regulatory easing by financial authorities. Ultimately, the liquidation resulted in losses, making it a case of reckless investment failure without considering business viability.