The Rising Son

Last week, Japan’s Z Holdings, the owner of Yahoo Japan, and South Korean messaging app Line, owned by Naver, announced a merger that would create a $30 billion Internet giant with over 100 million users. SoftBank holds a 40% stake in Z Holdings, and Naver, the South Korean web portal, owns more than 70% of Line. The new company will also become the dominant mobile payment service provider in Japan, vying with China’s Alipay, Singapore’s Grab and Indonesia’s Gojek.

The companies plan to reach a definitive agreement by December 2019 in a transaction that would see SoftBank and Naver form an equally split joint venture called Z Holdings; Yahoo Japan and Line would fold into this new company.

Yahoo Japan was once the country’s leading search engine, web portal and major e-commerce player, but has lost ground to Amazon and Rakuten as users migrated from PCs to smartphones, squeezing the company’s online shopping offering.

Line’s origins date back to the turn of this century. It has 82 million monthly active users in Japan and it’s the dominant messaging service in Taiwan and Thailand, where it counts 21 million and 45 million customers respectively. The company has been expanding into financial services by working with Nomura Holdings and Mizuho Financial Group. Line has also been developing a range of hardware products powered by artificial intelligence, including speakers and earphones.

SoftBank CEO Masayoshi Son has backed hundreds of start-ups around the globe as part of his Vision Fund, but is now attempting a complex deal to create a home-grown company that can effectively compete with global rivals like Alibaba, Amazon and Google. Line and Yahoo Japan are hoping to use local knowledge to stay in the race in their home country and markets where their services are popular, including South Korea, Taiwan, Thailand and Indonesia.

The two companies said the combination is fuelled by a sense of crisis that global giants are increasing their grip on the technology industry, and countries like Japan risk falling behind. Together, the two companies will benefit from greater scope and scale as they share engineering resources, access broader sets of data and invest more in areas like artificial intelligence.

The merger of Yahoo Japan and Line will also be a big test for Japanese antitrust authorities: as antitrust regulators worldwide aim to regulate the so-called Gang of Four — Amazon, Apple, Facebook and Google. Japan’s regulators will have an opportunity to find out how well their new guidelines stack up.

This planned merger comes at a time of heightened political tension between Japan and South Korea, and it could be a small step to cooling tensions, as it’s the two countries’ most significant economic cooperation of the past decade. The deal also highlights the need for scale, given the amazing level of control and influence that a few companies now have on the global technology market and on the world economy.