South Korea Tech Star Arrested, $10 Billion Fortune Lost BNN Bloomberg

(Bloomberg) — Three years ago, Brian Kim was the pinnacle of South Korea’s internet industry, a celebrated entrepreneur who built the messaging platform most used by the country’s 50 million people. Now he’s in jail and preparing to fight for his freedom and his empire in court.

Kakao's founder was arrested just after 1 a.m. Tuesday on suspicion of conspiring to fix prices during a high-profile takeover bid for K-pop agency SM Entertainment. The deal was meant to cement Kakao's dominance in markets including music, shopping and ride-hailing. But it also triggered a series of regulatory blowbacks and cast doubt on the future of up-and-coming innovators challenging the country's entrenched conglomerates.

It's a stunning turnaround for the 58-year-old Kim, who denies any wrongdoing, after he became South Korea's richest man with a net worth of $14.4 billion, down to about $3.6 billion as of Monday, according to the Bloomberg Billionaires Index.

His arrest also reflects a shift in attitude among South Korean authorities. He and fellow entrepreneurs like Coupang's Beom Kim were once hailed as visionaries who beat out Silicon Valley giants to carve out a unique position in the internet world, taking on the steel companies, chipmakers and shipbuilders that still dominate South Korean business. But as their power grew, government officials became concerned that internet services were displacing incumbents in areas such as banking, retail, entertainment and even mom-and-pop shops.

Critics point out that Kakao has spun an unusually large number of affiliated companies — more than 120 according to the latest official data — that hold shares in each other, echoing a strategy first adopted by the country's largest conglomerates, the so-called chaebol, that prompted a government crackdown on potential abuses.

Park Ju-geun, president of Leaders Index, a Seoul-based business research firm, said Kim was a symbol of South Korea's technological innovation. But Kakao's expansion led to numerous spinoffs and initial public offerings that eroded shareholder value and created uncertainty about its management as Kim's closest associates took key positions at the company's subsidiaries.

Kakao shares, which have fallen about 25% so far this year, fell 5.4% in Seoul on Tuesday, taking the company's total decline from its all-time high in 2021 to more than 75%, wiping out more than $40 billion in market capitalization.

Kim and a Kakao spokesman have repeatedly denied the allegations and said no illegal activity occurred during SM's acquisition. Kakao said on Tuesday that the company, now led by Chief Executive Chung Shin-a, regrets the situation and will do its best to minimize management disruption.

South Korean authorities have convicted and jailed corporate executives for decades for alleged corruption and other wrongdoings, most recently Jay Y. Lee, the current chairman of memory chip and smartphone maker Samsung Electronics Co. But Kim represents the first of a new type of tech entrepreneur who has run afoul of the law.

South Korean courts have historically not hesitated to jail business heavyweights. Chairmen of well-known companies including Samsung, Hyundai and Lotte have been jailed in the past, but many were pardoned and returned to work after a few years. Samsung's Lee was released in 2021 after years of legal troubles, reflecting the influence of the chaebols and efforts by successive governments to push for reform.

Decades ago, when South Korea was rebuilding its industry from the ruins of the Korean War, companies were largely exempt in the pursuit of economic growth, said Kim Seong-soo, a political science professor at Hanyang University in Seoul. But that has changed as South Korea has transitioned into a vibrant democracy where the most powerful companies can be scrutinized for the public good.

But no internet mogul had suffered such a fate until Kakao's Kim. While Seoul's attention has been on emerging economy bellwethers Coupang and Kakao since 2021, few expected Kim to be detained so suddenly.

Why Samsung's billionaire heir is in and out of prison: QuickTake

The billionaire has been dealing with numerous investigations into everything from whether he paid his taxes to allegations of monopolistic practices since 2021, after he was embroiled in a bidding war for SM Entertainment with Hybe Co., the agency behind hit boy band BTS.

Prosecutors allege that Kakao executives bought up SM shares during the competition, raising the price above Hyves' takeover bid of 120,000 won a share, in an attempt to thwart the rival's efforts. Financial regulators have accused executives at Kakao and its subsidiary Kakao Entertainment of buying 240 billion won ($173 million) of SM shares at the time to thwart Hyves' takeover bid. The court decided to detain Kim until investigators can uncover more details.

The arrest marks a disturbing chapter in one of the industry's most fascinating rags-to-riches stories.

Mr Kim, who grew up sharing a room with seven other family members, founded what would become Kakao in 2006. Four years later, he launched the hugely successful KakaoTalk mobile messaging app that became the core of an online empire that included banking, shopping, games and ride-hailing. At one point, he surpassed Samsung's Mr Lee to become the country's richest man.

But he also came under intense scrutiny. Concerned about Kakao's expanding scope, regulators took steps to prevent monopolistic practices. In early 2022, a police investigation into reports that Kim had evaded 886 billion won in taxes from its 2014 merger with rival Daum wiped out more than $25 billion in the market capitalization of Kakao and subsidiaries including Kakao Pay Co., Kakao Games Co. and Kakao Bank Co. The company insisted the allegations were unfounded, and tax authorities later denied them, Yonhap News Agency reported.

As pressure mounted late last year, Mr Kim sought to change his image by shaving off his moustache and beard for the first time in 17 years, and vowed to reform his company, saying he would not hesitate to change its name if necessary.

Kim's group remains the country's 15th-largest conglomerate by assets, with 124 affiliates, according to data from the Fair Trade Commission and the company. It's unclear what steps Kim might take to ease regulatory pressure. But his imprisonment casts doubt on hopes the founder would list his entertainment assets separately. It's also in the midst of rolling out AI services after rival Naver released its HyperCLOVA X chatbot in 2023.

Seo Bo-kyung, a senior analyst at Sanford C. Bernstein, said the company was under ongoing pressure from private investors and the government over the spin-off's listing, and Kim's detention had increased uncertainty about Kakao Entertainment's listing.

Park Ju-geun of research firm Leaders Index said Kim's problems stem from his decision to follow the strategic path set out by South Korea's biggest companies.

After Kakao and Kim achieved some success, the path they took was similar to that of a conglomerate, he said.

–With assistance from Tom Maloney and Shinhye Kang.

2024 Bloomberg LP

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