Daum to merge with Kakao, creating 3 tln won IT giant

SEOUL, May 26 (Yonhap) -- Daum Communications, South Korea's second-largest Internet portal, announced Monday it will merge with the country's top mobile messenger service, Kakao, through a stock swap arrangement.

The merger and acquisition deal announced through a regulatory filing by Daum will create a giant information technology (IT) company, to be named Daum-Kakao, which will have market capitalization exceeding 3 trillion won (US$2.93 billion).

The company will shake up the local portal and mobile social network market that has been dominated by Naver, which has steadfastly controlled about 70 percent of South Korea's portal market.

The deal will make Daum-Kakao the second-largest company on the tech-heavy KOSDAQ market in terms of aggregate value of listed stock after the biomedical company Celltrion Inc. The company is expected to have a staff of 3,200, counting 600 from Kakao.

The stock swap ratio has been set at one Daum share for 1.556 shares of Kakao. Daum will exchange its newly issued stocks for those of Kakao.

Both companies held a board of directors meeting on Friday to approve the merger. A general meeting of shareholders will be convened in August to finalize the deal. The official merger is expected on Oct. 1.

In a press conference held in downtown Seoul, CEOs of the two companies said the latest consolidation will help solidify core business operations and create positive synergy for the new company that can allow it to better cope with rapidly changing market conditions.

The two companies are thought to complement each other's weaknesses. Daum has been cited for being unable to reduce the gap with Naver in the mobile business sector, although it has done well in Internet games, while Kakao has little infrastructure in the Internet web arena and suffers from insufficient resources to expand abroad.

Daum and Kakao plan to operate separately for the immediate future, but will take steps to fuse operations in a gradual manner, the CEOs said.

"Kakao's competitiveness in the mobile platform coupled with Daum's strengths in contents and service business know-how will fuel growth," said Daum CEO Choi Sae-hoon. Kakao's chief, Lee Seok-woo, said the merger will permit the new corporate entity to grow into a highly competitive communication and information platform.

"The newly formed company will lead revolutionary changes in the mobile communications sector," Lee stressed.

Daum, founded in 1995, has been a leading presence in South Korea's Internet market, having created e-mail and media services and on-line search engines. It boldly moved its head office to the southern island of Jeju. The company, however, has been losing ground to Naver, the country's top portal.

Launched in 2006, Kakao has emerged as a leader in the mobile platform market with its popular Kakao Talk and expanded its services to include Kakao Story.

KB Asset Management, the second-largest stakeholder in Daum, and other local investors said they plan to hold on to their shares since the latest move is expected to contribute to long-term growth.

A source at KB Asset said the company will not sell off its Daum shares in order to lock in profits even when Daum shares rise on the KOSDAQ market.

On the downside, there has been worries that local Internet game companies may leave Kakao's platform because they fear unfair competition from Daum which has its own game operation.

Investors with stakes in Kakao are expected to make a windfall from the merger, although Kakao is not traded on the bourse. China's Tencent Inc. bought 13.3 percent, or 3.6 million shares, in the South Korean company for 72 billion won ($70.3 million) in April 2012, making it the second-largest shareholder after Kakao's board chairman, Kim Beum-su, who holds a 53.6 percent stake in the company.

Industry observers said Kakao has given appraisal rights to dissenting shareholders who oppose the merger, which would allow them to sell their shares for 113,429 won each. If Tencent capitalizes on its rights, it could collect 408.3 billion won, or 5.7 times what it paid for them. The company has yet to make clear what action it will take.

Share price of Naver fell 3.99 percent on the main KOSPI market during the trading session on concerns that Daum-Kakao will blunt the competitive edge of the leading portal company.

Stock prices fell to 745,000 won with 200,000 shares changing hands, four time larger than on Friday. In just a single trading session, 24.45 trillion won worth of Naver's stocks evaporated, dragging the company down to eighth place in terms of total value of aggregate stocks on the main bourse after Kia Motors Corp.

Market watchers predicted that Naver's position will not be easily usurped, but the company may be hurt in terms of earnings and market domination that has lasted for a decade.

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