TOKYO -- Line and Yahoo Japan will invest at least 100 billion yen ($917 million) a year to improve personalized advertisements and other services after their merger is completed, pledged Line CEO Takeshi Idezawa.
The deal, which will create an internet platform serving over 100 million people in a challenge to U.S. and Chinese tech giants such as Amazon and Alibaba, and which was first reported by Nikkei earlier this month, was officially announced on Monday.
The merged entity will become Japan’s largest internet services company with the backing of SoftBank Group and its CEO Masayoshi Son’s artificial intelligence-driven investment strategy.
“Going forward, we will boldly invest 100 billion or more,” to convert consumers and businesses to Line and Yahoo services, Line CEO Takeshi Idezawa told reporters on Monday. Details of the synergies will be worked out after the merger is completed in October 2020.
Kentaro Kawabe, the CEO of Yahoo Japan operator Z Holdings, said he had been approaching Idezawa with the idea of forming a partnership for years without success.
Idezawa’s tone changed “dramatically this year” as Line racked up losses in the crucial mobile payments sector, in which it competes directly with Z Holdings' PayPay payments platform.
When Kawabe presented the deal to Son earlier this year, the billionaire venture capitalist said he “agreed 100%” and called for a “speedy execution” of the merger, Kawabe said.
The complex deal essentially gives SoftBank’s mobile unit control of Line with minimum capital requirements, according to analysts.
SoftBank and Naver will each spend about 170 billion yen to acquire the roughly 27% of shares in Line not owned by Naver.
SoftBank will raise its minority ownership in Line to 50%, but the cost will be offset by transferring Z Holdings shares to Line, according to a SoftBank spokesperson.
Line will then transfer its assets to a new subsidiary, which will swap Line shares with new shares issued by Z Holdings.
In the end, SoftBank will have a 50% stake in a joint venture that owns 65% of Z Holdings, which will remain listed. Z Holdings will wholly own Yahoo Japan and Line. Son’s SoftBank Group owns about 66% of its mobile unit.
The merger, meanwhile, is drawing strong antimonopoly attention among Japanese antitrust regulators.
While mergers between companies with a certain amount of sales often need to go through an antimonopoly screening, deliberations on how to regulate deals between highly influential companies that operate web-based platforms remain up in the air.
The merger plan between the operators of Yahoo services and the Line chat app is expected to be a test case for new guidelines for corporate marriages that the Japan Fair Trade Commission (JFTC) is preparing.
Yahoo Japan is run by Z Holdings, while Line is part of South Korea's Naver, which also runs that country's dominant search engine.
As competition policy authorities around the world grow keener to somehow regulate the Big Four technology companies known as GAFA -- Google, Amazon, Facebook and Apple -- Japan's trustbusters will have an opportunity to find out how well their new guidelines can stand up to mergers of digital service providers.
"As the JFTC looks at whether to permit the merger or not, a considerable amount of theoretical armaments will be needed," said Tsuyoshi Ikeda, a lawyer familiar with antitrust law. "The screening is expected to become difficult."
One difficulty the JFTC must navigate is how to define markets. The commission will need to determine where Yahoo Japan and Line compete and how their merger will affect the competitive environments of these sectors. These determinations will come down to whether Yahoo and Line are "horizontal" rivals who compete for customers or have "vertical" relations like those between sales companies and manufacturers.
"Although the two companies engage in various businesses, the number of services where they are considered directly competing is limited," attorney Toshiaki Tada said. "It will be extremely difficult to determine markets where their merger will affect the competitive environments." Many lawyers versed in antimonopoly law share Tada's view.
As for how Japan's communication services market will be affected, Yahoo email does not really compete with Line chat. But Yahoo and Line do compete in smartphone payments, with each having a relatively thick slice of the market.
Still, millions of consumers use neither Yahoo's PayPay nor Line Pay, and there are millions of others who use a variety of other payment services. This has experts wondering whether the competitive payments relationship between Line and Yahoo can be examined in detail by comparing user numbers.
Observers are also wondering what conditions the merger will have to meet to obtain JFTC authorization.
For big overseas mergers, antitrust authorities often require that the corporate spouses sell off certain businesses.
In a merger involving data businesses, U.S. and European authorities required Thomson of Canada and Reuters Group of Britain to sell their databases of company information before permitting the merger in 2008.
But it would be unrealistic to expect Yahoo and Line to sell the data they have been accumulating on their users to third parties, if for no other reason than privacy protection.
The JFTC is expected to closely examine "internal documents" from Yahoo and Line to figure out the real purpose of the deal. The documents will not be limited to minutes of board meetings, and are likely to include emails and texts sent and received by executives and others.
Online platform companies not only offer payment, communication and other services but also combine these tools to corral customers.
With advertising revenue having hit a wall, Facebook and other giant data harvester/brokers are making a strategic shift to aggregating customer information, especially that generated by payment services.
What are SoftBank's and Naver's intentions with their treasure troves of payment data? Do their intentions pose a threat to competition in Japan's smartphone payments field? This is what authorities hope to learn by examining internal documents.
In the U.S. and Europe, companies are fined if they refuse to present information to authorities, but in Japan submissions are voluntary.
Experts point out the difficulty of attempting to alleviate potential threats to a competitive sector by setting conditions. Platform operators might attempt to persuade users to sign up for their payment services by not allowing competitors' tools. Trustbusters, then, might ask platform operators that are merging to allow more payment options, but such requests can be turned down for security or technological reasons.
Eventually, authorities have no choice but to abstractly ask operators "not to corral customers," leaving the possibility that the walled-garden problem will resurface -- and debate will reignite -- several years after a merger is authorized.
The JFTC, which on Nov. 5 stopped accepting public opinions on its proposed guidelines for corporate marriages, is hastily sorting out ideas about how service markets are defined and how the competition in these markets can be properly analyzed to deal with mergers and acquisitions among digital players. To address each deal, however, knowledge about information technology, the ability to conduct professional economic analyses and other kinds of expertise are needed.
Several months ago, the Federal Trade Commission of the U.S. set up the Technology Task Force, consisting of more than 10 lawyers and other experts, to probe giant tech companies as part of preparations for court battles down the road.
Regulations are hardly meaningful if potential threats to competition are not closely scrutinized. But cautious approaches are necessary if governments are to tighten regulations at some point in the future.
If Japan fully regulates platforms, it needs a team of officials who can arm themselves with theoretical backing. They will also need the power to enforce rules if they are to effectively regulate rapidly changing businesses.
The Yahoo-Line merger will be a key test for Japanese antitrust authorities.