South Korea’s Kakao Corp, operator of the nation’s dominant mobile messaging service KakaoTalk, announced on May 26 a merger with internet portal Daum Communication in an all-stock deal that values the messaging app operator at $3 billion. The merged company will operate under the name “DaumKakao.”
The announcement has attracted international attention, since the merger is expected to have powerful implications for competition among messaging services, which include WeChat, Whatsapp and Line, all eager to expand their influence around the globe.
While the media is focused on DaumKakao’s next move, the fact that Tencent Holdings, a Chinese corporation operating a range of popular mobile services in China, including QQ and WeChat, is to become the second-largest shareholder of DaumKakao as a result of the merger has raised concerns among Koreans, who fear that the merger might threaten KakaoTalk’s integrity.
With the merger, Tencent, which owns 13 percent of top South Korean mobile messaging provider Kakao, could receive a major boost to its regional expansion plans.
Tencent first invested about $70 million in Kakao Corp in 2012 when the South Korean company was experiencing financial difficulties. It launched its own messaging service, WeChat, in 2011, considered by some to be a copy-cat version of KakaoTalk. Since then, the Chinese messaging service has enjoyed explosive growth.
The number of users of Chinese messaging services reached about 600 million as of December last year, vastly more than competitors such as KakaoTalk and Line can boast. With the rapid growth of WeChat, Tencent has seen its revenue surge as well. According to a company announcement on May 14, sales were up 36 percent for the first quarter of this year compared to the year-ago period.
In fact, Tencent already has had previous success making a fortune from a copy-cat strategy.
QQ, the instant messaging software service developed by Tencent, was based on the Israeli messaging service, ICQ. In fact, QQ was originally called “OICQ.”
Since the launch of QQ, Tencent had gone to considerable lengths to tailor the service to Chinese consumers. The effort has paid off: Tencent is now the most popular instant messaging software in China, overtaking MSN messenger in terms of the number of users.
One of strategy Tencent likes to adopt is to acquire shares in companies it has used as benchmarks.
When ICQ was put on the market, Tencent attempted to take over the Israeli company, but was beaten to it by Russia’s Digital Sky Technologies (DST). A few years later, though, Tencent acquired a stake in DST itself.
Tecent adopted the same strategy with Kakao Corp. After it launched WeChat, basing it on KakaoTalk and becoming a leading messenger service provider in its own right, it acquired shares of Kakao Corp.
DaumKakao insists that the merger will boost its efforts to turn KakaoTalk into a global mobile messenger service. Kakao said that its merger with Daum was a way to compete against fast-expanding overseas rivals.
“We were concerned that we would fall behind in the global race,” Kakao co-chief executive Lee Sir-goo said.
The problem, however, is that Tencent has the same idea.
Guotai Junan International analyst Ricky Lai told Hong Kong’s English-language daily, the South China Morning Post, on May 27 that Tencent may identify new opportunities to co-operate with the merged company in South Korea and in other markets across Asia, given its strategic interest in Kakao.
KakaoTalk had 145 million users worldwide, compared with 450 million for Line, the more popular mobile messaging app run by Daum’s larger rival, Naver. Tencent’s WeChat meanwhile is available in 15 markets globally.
With this merger, competition in the mobile messaging service industry moves to the second round.