Kakao faces multiple whammy as CIO arrested

A Seoul court issued an arrest warrant for Kakao Chief Investment Officer Bae Jae-hyun on Thursday on charges of market manipulation related to SM Entertainment's stock price. The development has raised uncertainty about joint projects initiated by Kakao and SM Entertainment.

"The arrest warrant was issued due to concerns about Bae destroying evidence or fleeing," the court said.

The court dismissed arrest warrants for Kakao's head of investment strategy, surnamed Kang, and Kakao Entertainment's head of strategic investment, surnamed Lee.

However, the Financial Supervisory Service announced Thursday that the criminal charges against Kang and Lee are significant, and said it will continue the investigation.

The three Kakao executives are accused of manipulating SM Entertainment's stock price above Hybe Entertainment's tender offer price of 120,000 won ($88.30) per share by investing over 240 billion won in February, according to the FSS.

In early February, Kakao signed a partnership deal with the co-CEOs of SM Entertainment, Lee Sung-soo and Tak Young-jun, to buy a 9.05 percent stake in the K-pop agency.

In a counterattack, founder Lee Soo-man allied with Hybe, selling his 14.8 percent stake in the company. Lee also filed an injunction request, calling for the court to block the deal between SM and Kakao, which was eventually approved.

In this management dispute, Hybe, the K-pop powerhouse behind global sensation BTS, went for a tender offer, offering to buy shares of SM at 120,000 won. However, this was challenged by SM's skyrocketing share price.

In March, heated competition to take over the leading K-pop agency came to an abrupt halt, with Kakao seizing control of the label while its rival Hybe dropped its bid.

However, the investigation into Kakao manipulating SM Entertainment's stock price has been ongoing ever since.

This is giving Kakao a hard time, as last year was also challenging for the company.

In October last year, Kakao faced a service disruption of its main product KakaoTalk due to a fire at a data center.

Its online payment unit Kakao Pay also lost the trust of investors last year after former CEO Ryu Young-joon and seven other executives sold 90 billion won of the payment unit’s shares only a month after Kakao Pay went public in December 2021.

Most recently, a civic organization filed a lawsuit accusing Kakao founder Kim Beom-su and executives of Kakao's blockchain platform Klaytn of embezzlement and other charges.

The arrest warrant issued Thursday has also created uncertainty around joint projects that Kakao and SM Entertainment have already begun.

“Numerous lawsuits, investigations by prosecutors and financial authorities surrounding Kakao have intensified, leading to a diversion of management resources,” Samsung Securities researcher Oh Dong-hwan said.

In particular, industry insiders see that current risks could disrupt the two firms’ international expansion plans.

Kakao aims to increase the portion of its overseas revenue to 30 percent by 2025.

Kakao surpassed 1 trillion won in overseas sales last year, and the share of overseas sales (19.7 percent) increased by 9.4 percentage points on-year.

Kakao Entertainment, a subsidiary of Kakao, has been actively promoting global expansion with popular SM Entertainment artists like NCT and aespa. In August, they established a unit together in North America.

To make matters worse, the financial performance of the tech giant is far from promising.

In the first quarter, Kakao's operating profit was 71.1 billion won, less than half of the 158.7 billion won in the same quarter of the previous year. In the second quarter, it experienced a 33.7 percent on-year decrease of 113.5 billion won.

Also, several local brokerage firms have anticipated a poor third-quarter performance for Kakao.

Samsung Securities predicts a 16.8 percent decline in Kakao's operating profit in the third quarter from the same period last year, lowering the target stock price from 62,000 won to 54,000 won.

Hyundai Motor Securities, which set a relatively high target price initially, also reduced it from 80,000 won to 72,000 won.

As of Thursday, Kakao closed at 40,500 won, which is 1,300 won, or 3.11 percent, lower than the previous day's closing price.