Founder's arrest leaves Kakao's future in doubt

Kakao Corp., the operator of South Korea's top mobile messenger KakaoTalk, has been plunged into crisis, as its founder and top decision-maker Kim Beom-su was arrested on Tuesday on charges of stock price rigging linked to last year's takeover of K-pop powerhouse SM Entertainment.

With a leadership vacuum and a dent to its reputation, concerns are rising over the impact of the disruption on the tech giant’s drive for corporate restructuring and growth in burgeoning technologies including artificial intelligence.

On Tuesday, the Seoul Southern District Court issued an arrest warrant for Kim Beom-su after a hearing, citing risks of him fleeing and destroying evidence. Kim faces charges linked to his involvement in stock price manipulation and driving SM shares above the price fixed at 120,000 won ($86) per share for Hybe’s public buying.

Suspicions over market manipulation were sparked last year after Kakao won a controlling stake in SM in a bidding battle with Hybe, the agency behind K-pop sensation BTS. As authorities started to investigate the case, Kim announced Kakao’s emergency operation in October and has since spearheaded the group’s organizational restructuring, leading the CA Council, the group’s control tower.

“The current situation is unfortunate, but we will do our best to minimize the management gap, under the leadership of CA Council co-Chair Chung Sin-a,” Kakao said in a statement after the warrant was issued Tuesday. Chung doubles as CEO of Kakao.

Industry watchers raised concerns that the legal crisis will further hold back the IT giant's growth plans. Kakao has announced a plan to introduce a new AI service in the second half of this year, but critics view that the company has missed the window to get an early footing in the burgeoning AI market.

“We plan to introduce a new AI service that has Kakao’s distinguished characteristic this year,” Chung said at a company event in May.

The company was expected to introduce its large language model specialized in Korean language, KoGPT, last year, but the plan has been delayed.

Kakao also merged its AI business team and part of the Kakao Brain team in charge of AI to create the new entity Kanana, dedicated to research and development of AI technology in June.

“Kim is the one who can make the decisions arranging and adjusting the stakes for the affiliates of Kakao Group,” an industry official said under condition of anonymity. “A disruption to operation and development (of Kakao Group) appears inevitable with the arrest of the top decision-maker.”

The legal risks may also hold back the tech giant from making big decisions involving mergers and acquisitions as well as initial public offerings. In December, Kakao Pay’s attempt to take over Siebert Financial fell through, with the US brokerage firm citing concerns over the occurrence of a “significant adverse effect.”

Kakao Mobility’s plan to acquire an 80 percent stake in FreeNow, Europe’s largest mobility service, is also stalled.

There is also the possibility of Kakao losing its largest stockholder position in Kakao Bank, the online-only lender affiliated with the IT giant, if Kim is found guilty of the charges by the top court and is sentenced to a jail term.

Under the case, financial authorities would review the status of Kakao and could order the firm to dispose of bank shares held in excess of the ownership limit of 10 percent within six months.

Kakao currently holds a 27.17 percent share in Kakao Bank.

Kim is the largest shareholder of Kakao Corp., with 13.28 percent of its shares. He also has a 100 percent stake in K Cube Holdings, which is the second-largest shareholder of Kakao with 10.4 percent.

Shares in Kakao closed at 38,850 won, down 5.36 percent, in Seoul on Tuesday. Other Kakao Group affiliates also saw their stock prices fall. The shares of Kakao Pay and Kakao Games slid 7.81 percent and 5.38 percent, respectively. The prices for Kakao Bank and SM C&C went down by 3.79 percent and 3.25 percent, respectively.

On Thursday, CEO Chung vowed to remain firm and carry out the tasks the company has planned, in a temporary council meeting held after an arrest warrant was requested for Kim.

“Under the grave awareness of the reality, we will boldly execute the tasks that must be done,” Chung said, urging the employees to “remain steadfast” and committed to their work.

Kim is a self-made billionaire and a first-generation entrepreneur. He launched Korea's dominant messenger app KakaoTalk in 2010 and grew the internet giant into the 15th-largest conglomerate in the country.