Equity Valuation of Private Companies: Kakao Corporation at the Merger with Daum Communications

Kakao Corporation is a leading mobile lifestyle platform company in Korea, providing a mobile messaging service with voice calling capability and a variety of other services such as mobile games and streaming music. On May 26, 2014, Kakao announced a merger with Daum Communications through stock exchange. It was surprising that Kakao chose to go public through a merger with Daum (reverse takeover or backdoor listing) instead of an initial public offering. Unlike listed shares of Daum, Kakao’s shares are not publicly traded. Thus, the equity value of Kakao needs to be estimated to determine the stock exchange ratio between Daum and Kakao. In this case study of Kakao, we reformulate financial statements and demonstrate how to apply an accounting valuation model. More specifically, we adopt the residual operating income model and the abnormal operating income growth model in determining the equity value of Kakao. This case study will be useful for academics and practitioners to understand the equivalence of the residual operating income model and the well-known discounted cash flow model, as well as the benefits and costs of the backdoor listing vis-à-vis the initial public offering.