Naver's Japanese subsidiary LINE and SoftBank's Z Holdings (the parent company of Yahoo Japan) agreed on Nov. 18 to form a mammoth-sized platform based on their combined 100 million users under the vision of growing into a leader of the global artificial intelligence (AI) industry.
Naver and SoftBank plan to set up a 50-50 joint venture and invest 100 billion yen (approximately US$920 million) in cash each year in AI-related fields. This means that a Korea-Japan IT alliance will throw the hat in the ring of the global AI market to compete with the large U.S. and Chinese platform companies. Naver and SoftBank are expected to target the Southeast Asian market where LINE has secured a solid presence.
The big deal came from the two companies’ sense of crisis. The Google, Apple, Facebook and Amazon (GAFA) group of the United States and China's Baidu, Alibaba and Tencent (BAT) group are expanding across borders. Naver and SoftBank felt that they could either be absorbed by these groups or become their subcontractors. Naver sought to respond to the GAFA group by creating an AI research belt that encompasses Asia and Europe.
The LINE-SoftBank alliance created big effects. Most notably, the two sides laid out a plan to spend 100 billion yen in cash annually on AI-related fields in the mid to long term via the new joint venture. The first overseas base is expected to be established in Southeast Asia including Indonesia and Thailand where LINE has already established a presence. In the meantime, Yahoo Japan has been unable to go overseas with the Yahoo brand and logo due to licensing agreements with U.S. Yahoo. This seems to have frustrated chairman Son.
In terms of physical business size, the combined entity of the two companies overwhelms other IT companies in Japan. Z Holdings and LINE posted 954.7 billion yen and 207.1 billion yen in sales, respectively, last year. Their combined sales will surpass those of Rakuten, the biggest internet business company in Japan. The combined number of users will also expand to 100 million people (85 million LINE users and 50 million users of Yahoo Japan).
However, in Japan, some experts point out that the integration is something different from what LINE has done. "LINE is a group of creators different from other Japanese companies," said Murayama Keichi, a commentator at the Nihon Geizai Shimbun. " LINE found a sponsor called SoftBank for AI investment, but its integration with Yahoo Japan is a gamble. It is very important for SoftBank to maintain and enhance LINE’s enterprising and experimental spirit. ”
The two sides plan to sign the final agreement in December based on the agreement on management integration (capital alliance) on the day and complete the integration by October next year, after reviewing the Japan Trade Commission's antitrust law violation. Through the business integration, LINE will become a 50-50 joint venture stake between Naver and SoftBank and the joint venture will become the largest shareholder which will control Z Holdings. Z Holdings will have Yahoo and LINE as affiliates. Naver and Softbank will make a tender offer to acquire all of LINE shares. Unless they acquire all of its shares in the tender offer, they will make LINE a company owned by Naver and SoftBank through share consolidation and delist it.
After LINE is delisted, a new company that runs it will become a subsidiary of SoftBank. As a result, LINE’s sales and operating profit will be counted as those of SoftBank.
Some experts question whether or not Naver will transfer LINE to SoftBank in that a new company that will run LINE will become a SoftBank subsidiary. "The two companies are equal as the heads of the joint venture," Kawabe emphasized. "Although Naver judged that the integration will weaken Naver’s connection with LINE, Naver agreed to the integration for a bigger cause as Naver believed that they had to advance into Asia. Naver and SoftBank want to become a third big power after the two big powers of the United States and China.”