[Editorial] Back to basics

Kakao, an internet company that has grown from a mobile messenger to Korea's 15th largest business group in asset terms, is facing a crisis.

Kim Beom-soo, its founder, largest shareholder and former chairman, was summoned and questioned Monday by the Financial Supervisory Service in connection with alleged stock price manipulation.

He is suspected of conspiring to artificially boost the price of SM Entertainment shares to frustrate Hybe's tender offer for SM stocks.

Earlier, the FSS investigated Bae Jae-hyun, head of Kakao’s investment division who passes as No. 2 in the company, on the same suspicions. It asked the prosecution on Oct. 13 to request an arrest warrant for him. Bae is currently in detention.

Kakao competed with Hybe in February to acquire SM. The takeover battle drew much attention as it was expected to shape the landscape of the Korean pop culture industry. Hybe is the talent powerhouse behind K-pop sensation BTS. SM, founded by Lee Soo-man, a music producer who effectively introduced K-pop to a mass audience, is known for representing hit artists such as EXO, BoA and Girls’ Generation.

Hybe sought to buy SM Entertainment through a tender offer. But SM stock soared abnormally. Allegations of stock price manipulation were raised. The financial watchdog suspected Bae of boosting SM shares artificially using about 240 billion won ($178 million) in Kakao funds.

Eventually Hybe's bid failed and Kakao became the largest shareholder of SM.

An investigation is ongoing, but it seems unlikely that Bae would have committed an illegal act of stock price manipulation without Kim's instruction or approval. The FSS is said to have pressed Kim on this point.

Also, Kakao did not publicly announce its SM stock holding when it topped 5 percent of SM equity, when the law required it to do so.

Kakao argues it increased its SM stock holding through normal transactions on the public exchange, but if stock price manipulation is found, punishment will be unavoidable.

The Fair Trade Commission is currently reviewing the business combination of Kakao and SM Entertainment, and a conviction for stock price manipulation will likely affect the review negatively.

Depending on court rulings, Kakao may lose its qualification as major shareholder of KakaoBank.

The FSS is said to be considering whether to apply a joint penal provision to Kakao. By this provision, employers or corporations face criminal liability for the work-related crimes committed by their employees regardless of whether no fault could be imputed to employers. The major shareholder of an internet bank such as KakaoBank is required to commit no economic crimes.

Trust is vital to banks doing business with money that customers deposit. If allegations of stock price manipulation prove true, the guilty person should not run a bank.

Stock price manipulation is a grave crime. If someone manipulated the price of a stock to take a huge profit, ordinary investors who buy the stock at the artificially high price, unaware of manipulation, unfairly suffer losses.

SM shares soared above 160,000 won at one point during the takeover battle, but nosedived below 100,000 won in a month. The truth about the incident must be found and those found guilty sternly punished.

Kakao has been criticized for excessively diversifying its businesses. It even entered small-time markets including designated driver services, indoor golf driving ranges and beauty salons.

The number of its affiliated units jumped from 65 in 2018 to 144 as of August. During a National Assembly inspection of the government in 2021, Kim promised to withdraw from small-business markets. But he has not kept his word yet. In fact, the number of Kakao affiliates has increased.

The Fair Trade Commission will have to strengthen oversight to protect small businesses and consumers from Kakao's indiscreet business expansion. Kakao must return to the basics. It must stop dominating smaller markets and try to be the icon of real innovations through new growth strategies.