Kakao Pursues Corporate Split to Address Undervaluation, Market Remains Skeptical

Kakao is pushing for a corporate split, aiming to carve out its AI, advertising, and commerce divisions into a new company. This move is intended to address the "conglomerate discount" and ensure each business segment receives proper valuation. The plan involves creating KakaoAI for the profit-generating AI, advertising, and commerce units, and KakaoX for fintech, content, and mobility.

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The potential value of Kakao, as assessed by domestic and international securities firms' research centers this month, totals 34.2 trillion won.

The company's rationale stems from a perceived undervaluation, with potential value estimated by securities firms at 34.2 trillion won, significantly higher than its current market capitalization of around 16.8 trillion won. However, the market's response has been lukewarm. Investors are concerned about the growth potential of KakaoX, the surviving entity, which will be separated from Kakao's primary profit engine. The "main body" of Kakao, which will form KakaoAI, has historically been the group's cash cow, contributing 45-58% of operating profit and subsidizing other affiliates.

KakaoX plans to focus on growth strategies in virtual assets (fintech), global fandom (content), and robotaxis/logistics (mobility). Yet, if KakaoX fails to achieve expected growth after relisting, the combined market value of both companies could fall short of Kakao's current market cap. Adding to the complexity, Kakao Mobility and Kakao Entertainment, under KakaoX, face pressure from financial investors to exit their investments due to regulations against dual listings. This situation fuels speculation that the split might also serve as a step to divest non-core affiliates and investor stakes accumulated during Kakao's past expansion.

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Considering that the cash flow from KakaoTalk's core business has been heavily directed towards subsidiary investments and decision-making, it appears to be an efficient method for re-evaluating KakaoAI's corporate value.

Some industry observers suggest Kakao intends to gradually reduce its stake in affiliates under KakaoX through sales and reinvest the capital into KakaoAI's artificial intelligence business. The success of this split hinges on KakaoX's ability to independently secure new core businesses and investment opportunities to drive its value, while KakaoAI focuses on its AI ambitions.

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KakaoX needs to discover new core businesses or investment opportunities that can boost its corporate value.