Amid its aggressive expansion through mergers and acquisitions (M&A), Kakao faces criticism for its recent financial woes. Last year, the company reported significant impairments totaling 1.4 trillion won in goodwill. Goodwill, an intangible asset, appears on a balance sheet following M&A transactions when the acquiring company pays more than the net value of the target’s identifiable assets, reflecting factors such as brand reputation, intellectual property, and customer loyalty.
Sources within South Korea’s financial sector reveal that Kakao recognized goodwill impairment totaling 1.4833 trillion won last year. Kakao routinely conducts annual tests to assess the value of its goodwill, promptly recognizing losses as expenses. In 2022, Kakao’s goodwill impairment amounted to 700 billion won, surpassing that of SK, another company active in M&A, which totaled 448.6 billion won.
The majority of Kakao’s goodwill impairment originated from entities like SM Entertainment, Tapas Entertainment, Lionheart Studio, and MelOn. Kakao and its subsidiary Kakao Entertainment suffered a goodwill impairment of 283 billion won from SM Entertainment alone. Kakao Entertainment recorded a total goodwill impairment of 924.4 billion won, with 459.7 billion won from Tapas Entertainment and 231.3 billion won from MelOn. Kakao Games saw goodwill impairment of 184.3 billion won, primarily from Lionheart Studio, totaling 142.9 billion won, while Kakao Mobility faced 51.4 billion won in impairment.
The decisions regarding impairment recognition rely on projections of future cash flows. The increased magnitude of Kakao’s goodwill impairments is attributed to forecasts indicating declining performance of the acquired companies. For instance, MelOn’s operating profit margin decreased by approximately 5 percentage points from 10.3-11.9% in 2022 to 5.9-6.6% last year.
The substantial impairment of goodwill has adversely affected Kakao’s financial performance, as impairment losses are recorded as net losses. Despite achieving consolidated sales of 7.557 trillion won last year, Kakao incurred a net loss of 1.8166 trillion won. Operating profit also fell short of market expectations, recording 460.8 billion won compared to the forecast of 475.1 billion won.
Kakao’s subsidiaries are also undergoing liquidation processes for companies they established or acquired directly. Kakao Entertainment is currently liquidating its Asian subsidiary, along with Thai-based content production and supply companies Studio Phoenix and Studio Orange, and Kross Komics India. Kross Komics, which received investments totaling 200 million won and 4 billion won through capital increases, has completed its liquidation.
Additionally, Cradle Studio, a drama production company acquired in 2021, is set for liquidation, and the liquidation of Kross Pictures, which produced the Japanese version of the drama “Itaewon Class,” is being considered. Kakao Games has liquidated Life MMO, established in 2019.
Kakao stated, “The value of goodwill depends not only on future cash generation capability but also on factors such as perpetual growth rates and present value discount rates. Considering recent financial market conditions and competitive situations, we have actively moved forward with identifying impairments.”
