The Branching Tree Kakao Has Invested 428 Billion Won in Affiliates This Year

Subsidiaries Increase and Deficits Accumulate... Evolution with Kakao Funds
Poor Performance and Cost Burden... Expansion Becomes a 'Boomerang'

The tree with many branches, Kakao, is shaking. This year, it has spent an amount equivalent to its annual operating profit on supporting its affiliates. As the number of affiliates increased and deficits accumulated, and external funding became difficult, support from the parent company increased. With Kakao's own performance also sluggish, there are concerns that the reckless expansion of its business has backfired and caused significant damage.

Increasing Affiliate Support... Hemorrhagic Costs Also Covered by Loans

Since the beginning of this year until recently, Kakao has spent 428 billion KRW supporting its affiliates. When Kakao Space, Kakao Ventures, and Kakao Brain conducted paid-in capital increases, Kakao invested between 20 billion KRW and 70 billion KRW. It lent operating funds ranging from 20 billion KRW to 100 billion KRW to Kakao Enterprise and Kakao Investment. The scale of affiliate support is on the rise. In 2021, it was 76.6 billion KRW, and in 2022, it reached 435.7 billion KRW. Excluding the funds poured into the acquisition of SM this year, Kakao has spent nearly the same amount on existing affiliate support as last year. This is close to 80% of the expected operating profit of 550 billion KRW for this year.

Support is expected to continue in the second half of the year. This is because Kakao has announced aggressive investments of up to 300 billion KRW in new growth engines (new initiatives) such as cloud, artificial intelligence (AI), and healthcare. The new initiatives are handled by Kakao Enterprise, Kakao Brain, and Kakao Healthcare. Since the unveiling of next-generation mega AI and healthcare services is concentrated at the end of the year, additional investments are expected.

Besides investments for future technology development and new business promotion, there are also hemorrhagic costs. Kakao Investment and Kakao Enterprise are representative examples. When the promised sale of Kakao Hairshop fell through, Kakao Investment borrowed 20 billion KRW from Kakao to repay investors. Kakao Enterprise borrowed from the headquarters to cover severance pay and consolation money while conducting voluntary retirement.

Burden on Kakao Amid Poor Performance... Body Expansion Turns Toxic

There are two main reasons why affiliate support is increasing. The number of affiliates itself is increasing, and deficits are continuing. As of the first quarter, Kakao has 167 affiliates. The number steadily increased from 99 in 2019, 121 in 2020, 139 in 2021, to 152 in 2022. Although Kakao promised to reduce the number of affiliates and has partially reorganized them, the overall trend has not changed. In April last year, amid controversies over split listings and platform monopolies, Kakao announced a management reform plan. It promised to reduce the number of domestic affiliates to fewer than 100 by reorganizing more than 30 affiliates.

Most affiliates have fallen into a deficit swamp. Before establishing their business models, they experienced the 'Death Valley' that most early startups face, as external funding dried up due to the economic downturn. Kakao Enterprise, which had the largest loss last year (140.5 billion KRW), has been in the red for years. Kakao Entertainment turned to a deficit (13.8 billion KRW) last year despite revenue growth. Major affiliates such as Kakao Style (52 billion KRW), Kakao Brain (30.1 billion KRW), and Kakao Healthcare (8.5 billion KRW) are also in the red. Even the listed company Kakao Pay saw its deficit widen to 45.5 billion KRW.

The problem is that Kakao itself is not in a good situation. Although it currently has over 5 trillion KRW in cash assets, both its performance and stock price are sluggish. With the core business of advertising revenue recovering slowly, increasing affiliate costs are burdensome. As a result, securities firms are lowering Kakao's earnings forecasts and target stock prices. Analysts say that the reckless expansion of affiliates is backfiring. An industry insider said, "When the market was good, Kakao's model of raising investment and going public (IPO) worked, but now it is different. New technologies require mid- to long-term investment, and there is a possibility of additional restructuring, so the parent company will have to provide more support."

This content was produced with the assistance of AI translation services.