Yahoo! Japan And Messaging App LINE Agree To Merge To Compete Against Tech Rivals

18/11/2019

SoftBank-backed Yahoo! Japan and messaging app LINE have agreed to merge, as SoftBank’s founder Masayoshi Son seeks to create a Southeast Asia powerhouse in data and artificial intelligence.

The deal follows a long courtship of LINE by Son, who has long pitched the merger as a way to compete against bigger internet companies from China and the U.S., and most notably, against Japanese electronic commerce Rakuten, according to people familiar with the discussions. 

The merger, which is expected to be completed in 2020, values LINE at ¥1.3 trillion, creating a group that would operate under the Z Holdings Corp., that has a combined market value of ¥3.3 trillion. 

Both companies are having an equal share and power to control Z Holdings, which in turn makes the holding the entity to control both companies.

With the group’s $11 billion in combined revenue, the group would put itself well above rival Rakuten, and with access to a growing number of mobile users in Southeast Asia. 

Yahoo! Japan agrees to merge with LINE
Kentaro Kawabe (left), President of Z Holdings Corp., which operates Yahoo! Japan Corp., and LINE Corp. President Takashi Idezawa (right), announcing the merger on November 18, 2019. (Mainichi/Kota Yoshida)

LINE President Takeshi Idezawa, said at a joint press conference in Tokyo:

"We were driven by a sense of crisis about global competition and the pace of change in AI. The timing arrived for us to move on to the next phase [with this merger]."

To make this possible, LINE is first taken private through a tender offer at a proposal price of ¥5,200 per share, which represents a 13% premium to the messaging app’s share price on November 13, before the news about the merger went out.

Z Holdings, which is a subsidiary of SoftBank’s telecommunications arm, and Naver, the South Korean internet search group that owns 73% of LINE, plan to each spend ¥170 billion on the tender offer. 

After the merger, Z Holdings would remain a listed entity, and a consolidated subsidiary of SoftBank.

Analysts have often called for the two groups to merge.

With Yahoo! Japan having access to the LINE's 164 million monthly users in Japan, Taiwan, Thailand and Indonesia, the merger would strengthen the company in the mobile space. And as for LINE, the merger would allow it to tap into SoftBank’s ecosystem and benefit from its investment in AI and other technologies through the $100 billion Vision Fund. 

Overall, the merger would give both companies the access to a larger pool of data and stronger negotiating power with its advertisers.

"We want to become an AI tech company that leads the world from Japan," said Kentaro Kawabe, CEO of Z Holdings.

However, Goldman Sachs analyst Masaru Sugiyama said that Yahoo! Japan and LINE combined would still be "far smaller" than Rakuten in terms of transaction value of their digital payments services.

Even with its size, the merging two companies would still be smaller than Facebook, Amazon and China’s Tencent in every aspects, including from revenue, market value and research budget. 

Masayoshi Son
With SoftBank Vision Fund, one of the largest technology-focused venture capital fund with over $100 billion in capital, Masayoshi Son has invested on companies developing technologies in line with AI, finance or transportation.

Following the news, shares in Z Holdings rose 1.2%, while LINE climbed a bit steeper with 2.2%, and Naver gained 2.9%. Shares in SoftBank’s telecommunications arm however, fell 0.3%.

The merger of Yahoo! Japan and LINE came shortly after SoftBank suffered nearly $4.6 billion hit from its investment in WeWork, the troubled office-space company that has come to symbolize the excesses of startup culture.

"In the case of WeWork, I made a mistake," Masayoshi Son said to investors at a news conference in Tokyo. "I won’t make any excuses. It was a very harsh lesson."

By merging Yahoo! Japan and LINE, Masayoshi Son wants to regain his reputation.