How Kim Beom-su's arrest could stall Kakao's efforts to change

Kim Beom-su's arrest could stall Kakao's reform drive and key business decisions, impacting the ownership of Kakao Bank and AI services.

Kakao founder Kim Beom-su attends interrogation by the Seoul court on Monday. [NEWS1]

The arrest of Kakao founder Kim Beom-su could put the company's reform drive and major business decisions at a standstill, potentially plunging the tech giant behind Korea's biggest messenger app into the worst crisis since its foundation.

Ownership of the firm's cash cow affiliate, Kakao Bank, hinges on Kim's ruling while major business decisions, including the upcoming launches of AI-related services, could lose momentum.

Kim was arrested Tuesday on charges of market manipulation regarding the purchase of SM Entertainment last year, leaving the IT giant with a leadership vacancy for the first time since its establishment in 2006.

Still, legal procedures, including a court decision, are left to definitively determine whether the business mogul engaged in illicit activities.

The founder didn't appear for a scheduled probe by prosecutors later Tuesday, citing health issues. He pleaded not guilty to the charges during Tuesday's court hearing during which an arrest warrant was issued.

The arrest comes at a precarious time for Kakao. Kim has been spearheading groupwide reform at the company since last year aiming to reconcile negative sentiments derived from allegations of business malpractice and tightly knit personnel appointments.

That reform push, as well as other business decisions regarding AI-related services, M&A for future growth drivers and company restructurings, will likely stay in limbo until Kim's ruling comes out.

“We feel sorry for the current situation but will try our best to minimize the management vacancy with Chung Shin-a, co-chair of Corporate Alignment Council at the center,” Kakao said in a statement Tuesday.

Corporate Alignment (CA) Council is a top decision-making body that oversees and coordinates the management of Kakao's more than 120 affiliates.

If Kim is found guilty and sentenced with fines or harsher punishment, Kakao will have to unload its shares of the profitable, internet-only Kakao Bank. Korea's law bans companies with such financial crime records from the past five years from holding the majority shareholder status in internet-only banks.

Kakao is currently Kakao Bank's largest shareholder with a 27.17 percent stake.

That risk should put the approval of Kako Bank's new businesses on hold as well.

Kakao Bank's approval process for several new businesses — including obtaining a license for MyData, which would enable it to collect and analyze scattered personal data — is pending at the moment.

Kakao's AI business, already falling behind peers like Naver, could also be discouraged.

The company had originally planned to launch a large-language model called KoGPT 2.0 last year, but that has been tentatively delayed. Kakao says the project is still undergoing internal testing.

Kakao shares plunged across board on Tuesday

Its shares nose-dived by 5.36 percent on Tuesday, closing at 38,850 won ($28). Shares of Kakao Bank which rose by as much as eight percent in the morning trading session, closed at 20,300 won on Tuesday, down by 3.79 percent.

Kakao Pay and Kakao Games also tumbled by 7.81 percent and 5.38 percent respectively.

Kakao is accused of having colluded with private equity fund OneAsia Partners to artificially inject 240 billion won into the market to inflate SM Entertainment shares in order to block competitor HYBE from acquiring it.

Kakao ultimately came out as the winner in the takeover, securing a 39.87 percent stake in SM Entertainment jointly with Kakao Entertainment.

Kim is considered a visionary figure in Korea's IT industry. KakaoTalk, which he launched in 2010, has held an unrivaled position until now. The country's sprawling business, however, has come under harsh scrutiny in recent years in the wake of monopolistic market practices and morally irresponsible stock sell-offs by affiliate executives.

Kim who had stepped down as chairman of Kakao's board in 2022, returned to management last year, pledging for a fundamental overhaul of the group that could go as far as “changing the company name.” He launched the CA Council, which he is co-chairing with Chung, in early 2024. A separate external committee dedicated to compliance was founded last year as well.

The Seoul Southern District Court issued a warrant for Kim's arrest on Tuesday on the possibility of his fleeing or destroying evidence.

BY JIN EUN-SOO [jin.eunsoo@joongang.co.kr]