Yahoo Japan operator Z Holdings Corp. and Line Corp. said Monday they have reached a basic merger agreement that will forge an internet conglomerate boasting over 100 million users in Japan with the aim of challenging U.S. and Chinese online behemoths.

“In the internet market, overseas companies, especially those based in the United States and China, are overwhelmingly dominant,” the two firms said in a statement.

“Even when comparing the size of operations, there is currently a big difference between such overseas companies and those in Japan and other Asian countries, other than China.”

By taking advantage of Line’s user base of 82 million in Japan and Yahoo Japan’s 50 million, the firms said they will strengthen the merged company’s position in the country and expand services to other countries to become a “leading AI technology-based IT company.”

“We want to team up by sharing the sense of crisis and big ambitions,” Kentaro Kawabe, president and CEO of Z Holdings, said during a news conference in Tokyo.

Chinese and U.S. tech giants funnel billions to trillions of yen into research and development annually while Japanese companies are left behind. Another hurdle is the number of social challenges Japan is facing, such as a declining working population, lower productivity and natural disasters, the two companies said, adding that solutions to these issues can emerge from the information technology sector.

The duo’s big ambition is to become the main “Japan-focused artificial intelligence company” that can solve the problems unique to Japan, Kawabe said.

The company’s reach will expand to Thailand, Taiwan and Indonesia, where Line commands large market shares, and eventually worldwide, said Line CEO Takeshi Idezawa.

The announcement comes at a time when the SoftBank Group, of which Z Holdings is a member, is apparently beefing up its presence as an online conglomerate that can offer just about everything ranging from digital payments, finance, e-commerce to social media. Z Holdings recently acquired Zozo Inc., the country’s largest online fashion retailer, for ¥400 billion, and has partnered with SBI Holdings, the nation’s biggest online brokerage.

Line, Japan’s dominant messaging app provider, has been taking a similar path by adding a wide variety of services to its messaging platform in recent years while also betting on AI development.

The operational integration will surpass its domestic rival, Rakuten Inc., in terms of sales.

Z Holdings and Line had combined fiscal 2018 sales of about ¥1.16 trillion, more than the ¥1.1 trillion in sales that Rakuten racked up.

The merger also looks beyond the domestic market.

The U.S. tech giants collectively known as GAFA — Google, Apple, Facebook and Amazon.com. — have a global reach neither Yahoo Japan nor Line can match.

Line has a strong presence in Taiwan, Thailand and Indonesia but has been struggling to expand its global user base, which begs the question of whether a Line-Yahoo Japan force can keep up with overseas rivals.

Line, which is doubling down on AI development, sees joining forces with SoftBank Group under Masayoshi Son, who has invested heavily in the field, as a viable option to counter the GAFA and Chinese firms.

According to the announcement, SoftBank Corp., Z Holdings’ parent and a mobile phone unit of SoftBank Group Corp., together with Line’s parent, Naver Corp. of South Korea, will acquire all shares in Line for an estimated ¥5,200 per share through a joint tender offer.

Subsequently, Line shares will be delisted. Following the acquisition, SoftBank and Naver will turn Line into a 50-50 joint venture with Z Holdings under its umbrella. Yahoo Japan and the existing functions of Line will be housed under Z Holdings

Idezawa and Kawabe will become co-CEOs of Z Holdings.

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