Kakao Agrees to Merge With Daum Ahead of Seoul Listing

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Kakao Corp., South Korea’s largest mobile messaging service, agreed to merge with smaller listed Internet company Daum Communications Corp. (035720) rather than pursue its own planned initial public offering next year.

The share swap values Kakao at 3.1 trillion won ($3 billion), based on the terms of the deal contained in a Daum regulatory filing. Kakao will have more than 60 percent of the equity in the merged company, to be named Daum Kakao and listed in October. The deal makes Kakao board Chairman Kim Beom Su a billionaire after he jointly founded the company in 2006.

aThe merger follows Facebook Inc.’s acquisition of WhatsApp Inc. for as much as $19 billion and Rakuten Inc.’s $900 million takeover of Viber this year. It values Kakao, which had said it was aiming for an IPO next year, at about $23 per user, compared with $42 per WhatsApp user at the time of the Facebook deal. Daum will help Kakao expand beyond its mobile user base, said Heo Pil Seok, chief executive officer at Midas International Asset Management Ltd.

“Kakao would have needed to consider a merger at some point, even if it had decided to go public on its own,” Heo said by phone in Seoul. “Although Kakao is using its mobile network to promote games and other applications, there’s a limit to how much it can expand in its current state.”

Daum shares are suspended from trading today as the Korea Exchange reviews whether the merger plan meets its rules for backdoor listings, according to today’s filing. The shares rose 6.7 percent to 78,100 won, the highest level in more than seven weeks, on the Kosdaq index on May 23, the last day of trading before today’s announcement. Trading volume was more than 6 times the company’s average this year.
Competition

Naver Corp. (035420), an Internet portal that competes directly with Daum, fell 4 percent to 745,000 won at the close in Seoul, the steepest loss since April 7. South Korea’s benchmark Kospi index declined 0.3 percent. WeMade Entertainment Co., an online game maker that owns 5.6 percent of Kakao’s preferred shares, rose by the daily limit 15 percent.

“The merger will act as a strong growth boost for Daum, which has been struggling to keep up with Naver,” Heo said.

The number of unique visitors to Daum’s portal dropped to 26.6 million as of the end of March from 29 million at the end of April 2010, according to regulatory filings. That compares with 31.1 million for Naver as of the end of March.