Nexon-NCSOFT dispute reveals dark side

Kim Jung-ju Nexon founder

Top game firms’ governance thrown into question

By Yoon Sung-won

The ugly side of corporate governance has been laid bare by the mounting managerial dispute between the nation’s two largest game companies, Nexon and NCSOFT, industry watchers said Tuesday.

Both firms started as promising startups, but appear to have grown into typical chaebol that are controlled by family owners in an opaque manner.

Nexon Japan is listed on the Tokyo bourse and its founder Kim Jung-ju chairs the holding company NXC that controls its affiliates in Korea and Japan.

It is also NCSOFT’s largest stakeholder, with Nexon Japan holding a 14.68 percent stake and Nexon Korea, 0.4 percent.

Nexon has recently made it clear that it will intervene in the management of NCSOFT.

Last Friday, Nexon openly requested NCSOFT to sell its non-core assets for a greater payout of dividends. Nexon Japan, which pays tax to the Japanese government, and Kim will be the biggest beneficiaries of increased dividends.

The NXC headquarters moved to Jeju Island from Gangnam in Seoul in 2009 and has benefited from tax cuts since then. Companies moving their headquarters or manufacturing facilities outside the capital area for seven years are entitled to tax benefits.

Nexon also demanded NCSOFT disclose wages for its unregistered board members, who receive more than 500 million won annually and are affiliated with NCSOFT CEO Kim Taek-jin.

Kim’s wife Yoon Song-yee and his younger brother Kim Taek-heon are working as NCSOFT’s senior executives.

Yoo Jeong-hyeon, who is wife of Nexen Founder and NXC Chairman Kim Jung-ju, has been an auditor of the company and holds NXC shares. Yoo has worked with Kim since the establishment of Nexon in 1994.

An industry source said participation of the top executive’s families and acquaintances in business management is not rare in the local tech startup industry.

“Many tech startups in Korea start as small businesses. It is common for them to include family members, relatives and friends in management. It’s not an isolated case just for Nexon and NCSOFT,” the source said.

The two companies began cooperating in 2012 in an attempt to acquire U.S. game company Electronic Arts; Nexon’s Kim Jung-ju took over a 14.68 percent stake in NCSOFT from Kim Taek-jin during that period.

But the acquisition did not happen and the two companies have faced escalating competition in the game market both at home and abroad ever since.

Nexon argued that its proposal on Friday aims at promoting shareholder value and mutual growth of the two companies.

It said it will intervene in decisions of NCSOFT board of directors in naming new board members, except for NCSOFT CEO Kim Taek-jin. Nexon also demanded NCSOFT strengthen cooperation with external partners, diversifying from its focus of long-term game development projects.

NCSOFT was requested to answer Nexon’s demand that it takes steps to boost shareholders’ value by Tuesday.

Both companies, however, said they were not planning to publicize the contents of NCSOFT’s response.

NCSOFT is expected to disclose its position at a conference call with investors scheduled for today when it discloses its 2014 results.

“NCSOFT is known for its developer-centric atmosphere. Once a long-term project starts, the company delegates the development team to make most of the decisions related to the project,” an industry source said. “This may be an optimal environment for developers. But shareholders may not welcome this because it takes more time to get results.”

Expectations are that both Nexon and NCSOFT may try to expand their respective shares to seize control of NCSOFT.

Analysts, however, remained cautious to present their views amid remaining uncertainties.

“NCSOFT’s shareholder value will improve either way because the management control competition between the two will raise stock prices,” said an analyst at a local securities firm. “Speculation in the market is that Nexon may sell all its NCSOFT shares if the expected profit is insufficient. But as of now, no one can sure what will happen.”

NCSOFT shares closed down 1.83 percent or 4,000 won at 214,500 won, correcting recent gains on M&A speculation, and the benchmark KOSPI closed down 0.57 percent at 1,935.86 points.