[The Kakao Without Innovation]③ An IT Company That Does Not Discriminate What Makes Money... 173 Affiliated Companies

2 Subsidiaries Decreased in Q1 Consolidated Results
Gap with 93 Naver Companies in the Same Industry
"Number of Subsidiaries May Reflect Management Strategy"

Kakao, which manages numerous subsidiaries and has even penetrated neighborhood markets, has become a social issue. The reason Kakao earned the notorious label of an 'octopus-like expansion company' is due to criticism that its innovation achievements have not materialized properly. The arrest of founder Kim Beom-su, co-chairman of the CA Council and chairman of the management innovation committee, on charges of stock price manipulation of SM Entertainment (SM) is also analyzed as a result of reckless corporate expansion.

According to the Financial Supervisory Service's electronic disclosure system on the 31st, as of the first quarter of this year, Kakao's number of consolidated subsidiaries decreased by two from the end of last year to 173. On December 31, 2022, there were 142 consolidated subsidiaries, but during 2023, by bringing entertainment companies such as SM and KeyEast under its control, the number of subsidiaries exceeded 170. Currently, among the 173 subsidiaries, 7 are listed companies and 166 are unlisted. In the same industry, Naver holds 93 subsidiaries as of the first quarter, showing a significant difference from Kakao.

This subsidiary status reflects Kakao's expansion business strategy. When a parent company holds more than 50% of shares or exercises effective control, the company becomes a consolidated subsidiary. Since 2010, Kakao has attempted expansion into various fields based on the success of its national messenger KakaoTalk. It has expanded its business into areas such as simple payment, taxi calling, shopping, golf, designated driving, and transportation. Last year, it entered the entertainment sector through the acquisition of SM, and as of the first quarter, 11 subsidiaries have 'celebrity management' as their main business.

This strategy is also evaluated as choosing a 'safe path' rather than entering new industries. IT companies have faced criticism for infringing on neighborhood markets by leveraging platform influence. There have been claims that small business owners could suffer if Kakao raises fees to increase profits after securing platform customers. In response, Chairman Kim announced in 2021 that Kakao would withdraw from businesses infringing on neighborhood markets and has been reorganizing subsidiaries. Notably, it exited the flower delivery business, which risked encroaching on small business areas, and sold all of its 38.92% stake in Kakao Hairshop worth about 20 billion KRW.

Kakao is still continuing to downsize. The number of affiliates where the same person who controls the company, such as the corporate owner or legal entity, and related parties own more than 30% of shares or exercise management influence is decreasing. According to the Fair Trade Commission, Kakao had 147 affiliates in April last year, but now the number has decreased to 124. However, reducing the number of consolidated subsidiaries requires lowering the shareholding below 50% or relinquishing control, which is considered more difficult than reducing affiliates.

Professor Jeong Do-jin of Chung-Ang University’s Department of Business Administration explained, "The number of subsidiaries can be an objective indicator reflecting a company's management strategy or organizational culture. Although it is difficult to compare because the criteria applied to consolidated subsidiaries and affiliates differ, usually it takes a bit longer to reduce consolidated subsidiaries."

He also advises that Kakao should revise its strategy toward qualitative growth and redefine innovation. Professor Jeong added, "Kakao itself may have regarded expansion into various fields as innovation. However, criticism begins because what Kakao considers innovation was not accurately communicated to stakeholders, so for improvement, it is essential to sufficiently convey the goals and gain consensus."