The merger of two internet giants in Japan looks good on paper. The question is how well they can make it work.
Instant messaging app Line and news and shopping site Yahoo Japan, which is indirectly controlled by SoftBank, are in discussions to combine, the companies said Thursday. Both make most of their money in Japan. Line has around half of its users in three other markets—Taiwan, Thailand and Indonesia—but these only generate around a quarter of revenue. Yahoo Japan is separate from the U.S. Yahoo website, owned by Verizon Communications.
There are no details yet about how the deal would be structured. The two sides are considering a plan in which SoftBank and Line parent Naver Corp. would each own half of a holding company that controls both Yahoo Japan and Line. South Korean Naver owns 72.6% of Line while SoftBank owns 47.5% stake in Z Holdings, Yahoo Japan’s parent. The values of these two stakes were roughly similar before the announcements, at around $7 billion to $8 billion. Shares in both Line and Z Holdings jumped more than 15% Thursday.
There is clear potential for synergies in the combination, which brings together Line’s 82 million younger users in Japan and Yahoo Japan’s 50 million older ones. Cross-selling opportunities include allowing Line’s users to buy goods on Yahoo Japan’s e-commerce site within the chat app. The two companies could share data to improve Line’s ad targeting, including on behalf of Yahoo Japan’s merchants, and cross-sell advertising space.
Another area ripe for cooperation is the fledgling digital payment market in Japan, where most transactions are still in cash. Yahoo Japan, together with SoftBank and India’s Paytm, owns a smartphone payment service called PayPay, while Line has its own Line Pay service. Combining the two would help to extend their reach and shave costs. Both companies are currently bleeding cash on payments.
The Holy Grail would be to use the greater scale and scope of the combined company to create a “super app” akin to China’s WeChat, where users can send messages, browse news and shop in one place.
Meanwhile, the two companies still have their own problems to deal with. Line’s user growth has been stagnant, and investment in new growth areas has pushed its earnings into the red. At Z Holdings, advertising profit has been declining, while the e-commerce business faces an uphill battle against market leaders Amazon and Rakuten . Synergies from the merger could help, but will materialize only if cultural differences between the two companies—which offer different services to different demographics—are carefully managed.
A Line-Yahoo Japan combination could be a good deal, but even more than most mergers it will depend on skillful execution.
Write to Jacky Wong at jacky.wong@wsj.com
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