Will Kakao Games acquire Lion Hearts?

Will Kakao Games acquire Lion Hearts?

Kakao Games headquarters in Pangyo, Gyeonggi Province / Courtesy of Kakao Games

By Kim Hyun-bin

There is growing speculation that Kakao Games will seek to acquire a major stake in Lion Hearts that recently launched the hit multiplayer online role-playing game (MMORPG) “ODIN: Valhalla Rising.” Kakao Games has already acquired 21.58 percent of Lion Heart’s shares, becoming the second largest shareholder behind CEO Kim Jae-young. Kakao paid 19 billion won ($16.6 million) for the shares in the company.

According to the company’s business report, Kakao Games put in a call option condition for its early investment in Lion Hearts, which states “depending on the operating profit of Lion Hearts, (Kakao) will have the right to acquire additional shares.”

“ODIN’s” success has rapidly improved Lion Hearts profitability, which has allowed Kakao to buy additional shares. The company did not reveal the amount of the call option it could exert, but industry watchers believe, Kakao most likely would have set the amount at a figure enough to become the leading shareholder and to secure management.

The process is fairly common within the gaming industry with big companies investing early in startup businesses in exchange for a portion of the company’s shares. With the call option, once the game company produces a hit, the investor can purchase additional shares at an earlier fixed price. Early on, large investments are not needed to take over a substantial portion of a startup company, which also reduces risk. In the new business founder perspective, they can often use the investment as the means for an exit plan after taking profits from the new hit game.

Kakao Games has utilized the call option often as well as conversion rights in the past to reduce the financial risk of failure and efficiently secure early developers and their intellectual property (IP).

Just five years ago, Kakao Games was considered a mid-size game company with annual sales of around 100 billion won, but their recent success comes from early investments in promising startups and their IP, and it often acquired the company using its call option and conversion rights once business started to pick up.

“Kakao Games has been increasing the portion of in-house game development through M&As. Other Kakao branches also engage in aggressive investments and M&As to grow, and Kakao Games is no different,” Kim Hyun-young, a researcher at Hyundai Motor Securities, said. “Kakao Games started off as a publisher, and it’s going in the right direction to increase the portion of in-house developers and IP through M&As. It is expected to continue acquisitions of other promising new gaming companies, not only Lion Hearts,”

Kakao Games shares rose 6.53 percent to close at 86,500 won Friday from the previous close, with high expectations for the acquisition of Lion Hearts and the success of the “ODIN” game.

Kakao Games says there is no official response to the issue.

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