Kakao, the maker of free mobile instant messaging service KakaoTalk, has announced that it will merge with South Korea's second largest Internet portal Daum.

On Monday, May 26, the companies announced the merger through a stock swap. The merger is expected to benefit both the companies. Daum Communications has long wanted to enter the mobile market and Kakao has also sought to get more income from other sources away from its game platform, which is the company's primary income source.

Kakao is currently South Korea's top mobile messenger service. The company has around 130 million users who use KakaoTalk in South Korea that is 93 percent of smartphones in the country. The company has recently transformed itself to a distribution platform for the delivery of third party content and apps that includes a big variety of games, which users can download from the messaging platform and also play with friends.

Market observers believe that the merger of Daum and Kakao will result in the formation of a company with a market capitalization of three trillion won ($2.9 billion), which will give stiff competition to Naver, the country's biggest Internet portal.

Daum has been going through tough times as the company failed to cope with the prevalent market trends in the mobile industry combined with slow growth in revenues generated from online advertising.

Naver, Daum's biggest rival, has proved to be successful with the global launch of its Line mobile messenger that has attracted many customers. On the other hand, Daum's MyPeople mobile messenger was unable to attract the attention of customers even in South Korea.

However, Kakao is the market leader in South Korea when it comes to application downloads, beating Google Play as well as Naver apps.

"Despite the success in its main business, Kakao has an interest in the Internet portal business as the company has an initial public offering planned for next year. The company needs to find new income sources to give confidence to investors before the stock listing," says a source to The Korea Herald.

Kakao's game business has been sluggish recently with the number of users dropping to around 18 million in January this year when compared to 20 million users in January 2013.

Market analysts suggest that the merger will enable Kakao to increase its customer base beyond the mobile industry. Even if Kakao had decided to go public, the company would still have considered for a merger in the near term. 

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