(Bloomberg) -- Three years ago, Brian Kim sat at the pinnacle of South Korea’s internet industry — a celebrated entrepreneur who created the dominant messaging platform for the country’s 50 million people. Today, he’s in detention, preparing to fight in court for his freedom and his empire.
The Kakao Corp. founder was arrested just after 1 a.m. Tuesday for an alleged price-rigging scheme during a high-profile takeover battle for K-pop agency SM Entertainment Co. That acquisition was supposed to cement Kakao’s dominance in markets from music and shopping to ride-hailing. Instead, it triggered a series of regulatory blows — and raised questions about the future of up-and-coming innovators as they challenge the country’s staid conglomerates.
For the 58-year-old Kim, who has denied wrongdoing, it’s a stunning turn after reaching a peak fortune of $14.4 billion and earning his place as Korea’s richest person. As of Monday, that had dropped to about $3.6 billion, according to the Bloomberg Billionaires Index.
His arrest also reflects a shift in attitude among South Korea authorities. He and fellow entrepreneurs like Coupang Inc.’s Bom Kim were once hailed as visionaries who prevailed against Silicon Valley titans to carve out their own stakes on the internet — foils to the steel firms, chipmakers and shipbuilders that still control Korea’s business landscape. But as their power rose, government officials grew concerned about the way internet services were displacing incumbents in fields like banking, retail, entertainment and even mom-and-pop physical stores.
Critics pointed out how Kakao birthed an extraordinary number of affiliates — more than 120 according to the latest official data — that held shares in each other. That repeated a strategy first deployed by the nation’s biggest conglomerates, or chaebol, which had spurred government crackdowns because of its potential for abuse.
“Kim was an icon of tech innovation in South Korea,” said Park Ju-gun, head of corporate research firm Leaders Index in Seoul. But “Kakao’s sprawling business led to numerous spinoffs and IPOs that hurt shareholder value, while Kim’s inner circle took key positions at each subsidiary, which fueled an opaque management structure.”
Shares in Kakao, which have fallen by about a quarter this year, slid 5.4% in Seoul on Tuesday. That put its slide since a 2021 lifetime high at more than 75%, or over $40 billion of lost market value.
Kim and Kakao spokespeople have repeatedly denied the allegations and said no illegal activities transpired during the acquisition of SM. Kakao said Tuesday the company, now led by Chief Executive Officer Chung Shina, regrets the current situation and will do its best to minimize any management disruption.
Korean authorities have for decades convicted and imprisoned corporate leaders over allegations of graft or other wrongdoing — most recently Jay Y. Lee, now chairman of memory chip and smartphone maker Samsung Electronics Co. Kim, however, is the first of a new breed of tech entrepreneurs to run afoul of the law.
Korean courts have historically not shied away from jailing captains of industry. At different points in the past, judges have imprisoned the chairmen of household names like Samsung, Hyundai and Lotte — many of whom returned to work with pardons after a few years. Samsung’s Lee was released in 2021 after years of legal troubles. That reflects both the sway of the chaebol, and successive governments’ efforts to push through reforms.
“Several decades ago when Korea was building its industries from the ashes of the Korean War, companies had almost immunity in the pursuit of economic growth,” said Kim Sung-soo, a professor of political science at Hanyang University in Seoul. “That has all changed as Korea transitioned to a vibrant democracy that can scrutinize the most powerful companies for the sake of public good.”
No internet magnate has suffered that kind of fate however — until Kakao’s Kim. While Seoul’s gaze had since 2021 swiveled toward new-economy pioneers Coupang and Kakao, few expected Kim to get detained so abruptly.
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The billionaire has since 2021 dealt with a host of investigations into everything from whether he was paying his taxes to alleged monopolistic behavior. Then came the bidding war for SM Entertainment against Hybe Co., the agency that represents the hit boy hand BTS.
Prosecutors allege that Kakao executives sought to buy up stock and push SM’s price to above Hybe’s 120,000 won-a-share offer during the contest, stymieing its rival’s effort. Financial regulators have accused executives at Kakao and unit Kakao Entertainment Corp. of buying 240 billion won ($173 million) of stock in SM at the time, to disrupt Hybe’s offer. The courts decided to detain Kim while investigators worked out the details.
The arrest marks a troubling chapter for one of the industry’s most compelling rags-to-richest tales.
Kim — who as a boy shared a room with seven family members — founded the company that would become Kakao in 2006. Four years later, he started the massively successful KakaoTalk mobile messaging app, which would go on to become the heart of an online empire spanning banking, shopping, gaming and ride-hailing. At one point, he briefly surpassed Samsung’s Lee to become the country’s richest person.
But he also attracted intense scrutiny. Regulators, concerned about Kakao’s widening business reach, instituted measures to safeguard against monopolistic practices. In early 2022, a police investigation into reports that Kim dodged 886 billion won of taxes — stemming from a 2014 merger with rival Daum — wiped out more than $25 billion of market value from Kakao and subsidiaries such as Kakao Pay Corp., Kakao Games Corp. and KakaoBank Corp. The company has called those allegations “groundless,” and tax authorities later dismissed the allegations, Yonhap reported.
As pressure mounted at the end of last year, Kim tried to change his image by shaving his mustache and goatee for the first time in 17 years. He vowed to overhaul his company, saying he wouldn’t hesitate to change its name if it came to that.
Kim’s group is still 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 will take to mitigate the regulatory pressure. But his jailing casts doubt over expectations that the founder will list his entertainment assets separately. It’s also in the midst of trying to roll out AI services, after rival Naver Corp. launched a HyperCLOVA X chatbot in 2023.
“The company has been under continuous pressure from retail investors and the government for its spin-off listings,” said Bokyung Suh, a senior analyst at Sanford C. Bernstein. Kim’s detention has increased the uncertainty about listing Kakao Entertainment, he said.
Park Ju-gun of the research firm Leaders Index said Kim’s troubles trace back to his decision to follow the strategic path laid out by Korea’s leading companies.
“After Kakao and Kim built a certain amount of success, the path they went through mirrored the chaebol’s,” he said.
--With assistance from Tom Maloney and Shinhye Kang.
©2024 Bloomberg L.P.
