Kakao Losing Its Center... Overhaul and New Business Plans Hit Sudden Brake

Kakao's Kim Beom-su Arrested... First Ever Absence of a Chairman
Concerns Over Lost Focus in Management Reform and Weakened New Businesses

Kakao has faced a 'absence of its head' crisis for the first time since its founding. This occurred as Kim Beom-su, the founder and chairman of Kakao's Management Innovation Committee, was arrested on charges of manipulating the stock price of SM Entertainment (SM). With Kim, who had been leading the management overhaul at the forefront, now absent, Kakao has entered a standstill situation. Losing momentum in its reform efforts, the company is also expected to face a sudden halt in pushing forward new business ventures. The IT industry was shaken as the first-generation venture entrepreneur who built an IT empire with Kakao, a leading domestic platform, fell into custody.

Kakao founder and Management Innovation Committee Chairman Beom-su Kim, considered the pinnacle of the 'SM price manipulation' suspicion, is attending the pre-arrest suspect interrogation (warrant hearing) held at the Southern District Court in Yangcheon-gu, Seoul on the 22nd. Photo by Hyun-min Kim kimhyun81@

On the 23rd, Judge Han Jeong-seok of the Seoul Southern District Court, responsible for warrants, issued an arrest warrant for Chairman Kim, citing "concerns over evidence destruction and flight risk." The prosecution believes that Kakao manipulated the stock price to obstruct the public tender offer by its competitor, HYBE, in an attempt to secure management rights over SM. It is understood that Kim either instructed or tacitly approved this after being informed, leading to the request for his arrest warrant.

Chairman Kim has consistently denied the charges. During a prosecution investigation earlier this month, he reportedly stated, "It is true that I was informed of and approved the agenda to purchase SM shares on the market, but I was not informed about the specific purchase methods and processes, so I was unaware." At the temporary Kakao group council meeting on the 18th, he said, "The charges currently being faced are not true," and "I believe the truth will eventually be revealed as I did not instruct or condone any illegal acts," but he could not avoid arrest. On the day, Kakao did not issue any particular statement regarding Kim's arrest.

Management Reform Loses Its Focal Point

Kakao, which had been focusing on management reform, has lost its focal point. Chairman Kim declared emergency management last October and took the lead in management. He personally served as co-chairman of the CA Council, the group's control tower, and chairman of the Management Innovation Committee under it. Although the vacant position can be temporarily filled by Jeong Sin-ah, CEO of Kakao and co-chairman of the CA Council, or CEOs of major affiliates belonging to the Management Innovation Committee, it is difficult to replace Kim's role. To move away from the existing autonomous management system and improve the organizational structure into a centralized system and redefine growth methods, Kim's presence, which can control even the affiliates, is necessary. Given that the CA Council may operate only partially or require other reorganizations, Kakao is likely to be hampered again in its reform efforts. An industry insider expressed concern, saying, "Ultimately, only Chairman Kim can coordinate the interests of each affiliate and make final decisions," adding, "Without Kim, the central grip may weaken."

Major decisions such as mergers and acquisitions (M&A) for overseas expansion or initial public offerings (IPO) are expected to be difficult for the time being. Last December, Kakao Pay's acquisition of the U.S. securities firm Siebert was canceled amid emerging judicial risks. Kakao Mobility's planned acquisition of Free Now, Europe's largest taxi-hailing platform, has also effectively fallen through. Kakao Entertainment must renegotiate contract terms promised during the pre-IPO equity investment stage by the end of this year. Considering internal and external circumstances, there are expectations that the IPO timing and corporate valuation will be set conservatively.

Other judicial risks surrounding Kakao have also reached a peak. The Financial Supervisory Service, which requested this investigation, handed over both Kakao's corporation and management to the prosecution. Depending on the outcome of the SM acquisition trial, Kakao may have to relinquish its status as the major shareholder of its core subsidiary, Kakao Bank. The Internet Banking Special Act stipulates that major shareholders must not have been fined or punished under tax evasion laws, specific economic crimes, or the Fair Trade Act within the past five years. If Kakao is fined, it must dispose of all but 10% of its 27.17% stake in Kakao Bank.

Kakao Mobility is on the verge of sanctions over allegations of accounting fraud. The Securities and Futures Commission under the Financial Services Commission is expected to finalize and decide the level of sanctions next month. Earlier, the Financial Supervisory Service applied the highest penalty standards, recommending the dismissal of CEO Ryu Geung-seon of Kakao Mobility and filing a complaint with the prosecution. If intentional accounting fraud is confirmed, an investigation may proceed.

Weakened Growth Momentum

The next growth engine, the artificial intelligence (AI) new business, is inevitably losing strength. Domestic ICT companies such as the three major mobile carriers and Naver have been rushing to launch generative AI services, but Kakao remains silent. Although it plans to launch AI-integrated services on KakaoTalk in the second half of this year, market expectations have already weakened. Since last year, the company has only announced services without actual launches. In the AI business, where speed is crucial, there are criticisms that Kakao missed the optimal timing due to various controversies. Amid declining platform influence due to competition from YouTube and Instagram, there is a growing sense of crisis that even new businesses may be shaken.

The sluggish stock price may also be affected by additional negative factors. On the day, Kakao's stock opened at 40,350 KRW. Compared to the peak at the beginning of the year, it has dropped more than 30%. As a result, it fell from the third position in market capitalization to 20th. Amid consecutive setbacks, securities firms are lowering Kakao's target price. Samsung Securities adjusted Kakao's target price down by 13.6% to 51,000 KRW. SK Securities and Heungkuk Securities also lowered their targets by 20.5% and 9.5%, respectively. Samsung Securities analyst Oh Dong-hwan analyzed, "Management resources have been dispersed due to judicial risks such as the prosecution investigation related to the SM acquisition," adding, "Resolving judicial and regulatory risks is a prerequisite for securing aggressive growth engines for a rebound."

The IT industry is paying close attention to Chairman Kim's arrest. Kim is regarded as a first-generation venture entrepreneur who wrote an IT legend. He created Unitel at Samsung SDS, left Samsung, founded Hangame in 1998, and merged it with Naver to form NHN. After leaving NHN, Kim introduced KakaoTalk to the world in 2010, becoming a leading 'serial entrepreneur.' With Kim, a role model for entrepreneurs, now arrested, the industry is engulfed in shock. An anonymous industry insider said, "It feels bittersweet as it seems to show a facet of the rapidly growing IT industry," adding, "It is a time when maturity is needed to cope with the aftereffects."