Kakao enters emergency mode after founder's arrest

Industry

Published: 26 Jul. 2024, 18:55 Updated: 26 Jul. 2024, 18:56

Kakao enters emergency mode after founder's arrest

Kakao CEO Chung Shin-a speaks at a groundbreaking ceremony for the construction of Seoul Arena, the first K-pop centered cultural facility, at Dobong District, northern Seoul, on July 2. [NEWS1]

Kakao has entered an emergency mode following the arrest of its founder Kim Beom-su on charges of alleged stock manipulation during the acquisition of SM Entertainment.

If Kim is found guilty, Kakao could be forced to sell off or diminish its sizable stake in Kakao Bank and other assets. This regulatory risk has resulted in a market cap loss of over 1 trillion won ($721.3 million).

Kakao CEO Chung Shin-a held an internal corporate meeting on Thursday that lasted for four hours to inspect external and internal risks facing the company during Kim’s vacancy.

Under the new system, Chung will temporarily act as the chair of the management reform committee under Kakao’s corporate alignment (CA) council, which is a top decision-making body comprising of 13 main affiliates including Kakao Mobility, Kakao Pay, Kakao Piccoma, Kakao Healthcare, Kakao Brain, Kakao Games and Kakao Entertainment.

Kim had headed the committee prior to his arrest.

The monthly meeting members of the CA Council will now convene weekly to quickly follow up and respond to major management issues.

During the meeting, Chung reportedly reiterated each affiliates’ efforts toward ongoing reform projects, and that the development of its AI services, which Kakao has been fronting as its new growth drivers, will continue without any hiccups.

Following Kim’s arrest on Tuesday morning, Kakao’s market value evaporated by 1.7 trillion won, with shares sinking 5.36 percent compared to the day before.

On Friday, the shares have fallen 1.85 percent to close at 39,800 won compared to the day before.

Following the regulatory crisis, the company was rumored to be selling off its affiliates, including Kakao VX, which runs a gold studio rental service that had a 7.7 billion won operating loss last year.

A Kakao spokesperson denied the speculation, commenting that the company is “not considering selling it.”

Nonetheless, Kakao’s labor union is scheduled to stage a protest in front of Kakao’s headquarters in Pangyo, Gyeonggi next week against potential employment insecurities regarding the speculation.

Ownership of the firm’s cash cow affiliate, Kakao Bank, remains uncertain as Kim is under investigation. If Kim is found guilty and slapped with suspended sentences or a harsher ruling, Kakao will have to unload its shares of Kakao Bank. The law bans companies with such financial crime records over the past five years from holding a majority shareholder status in internet-only banks.

Kakao is currently Kakao Bank's largest shareholder with a 27.16 percent stake.

Kim is suspected of being involved in manipulating SM Entertainment shares by colluding with the private equity fund management company OneAsia Partners during the bidding war that pit the messenger giant against another K-pop powerhouse, HYBE, for the acquisition.

The two parties are speculated to have artificially injected 240 billion won into the market to drive SM shares above 120,000 won in February 2023 to hinder HYBE’s attempt to acquire the stock.

Kakao ultimately came out as the winner in the takeover, allowing it and subsidiary Kakao Entertainment to jointly secure a 39.87 percent stake in SM Entertainment.

The probe has been ongoing since February of last year, sparked by a report by HYBE requesting Korea’s financial regulator to investigate Kakao’s “abnormal” purchase of shares during the transaction. The prosecution and the Financial Supervisory Service raided Kim's office and Kakao’s Pangyo headquarters multiple times last year.

BY LEE JAE-LIM [lee.jaelim@joongang.co.kr]