By Takashi Mochizuki
TOKYO -- Investors welcomed plans for a merger to create an internet-services giant in Japan controlled by SoftBank founder Masayoshi Son, but Yahoo Japan and chat app Line face challenges combining their businesses.
A person involved in the discussions said Yahoo Japan, an internet portal affiliated with SoftBank Group Corp., and Line Corp. were likely to reach a merger deal this month. The companies confirmed merger talks and said nothing has been decided.
Shares of Yahoo Japan's parent rose 16.9% in Thursday trading in Tokyo and Line was up 15.4%, bringing the combined market capitalization of the two companies above $30 billion. Analysts said a deal could give Line chances to monetize its user base of tens of millions of Japanese and other Asians, most of whom pay little or nothing using the app, and Yahoo Japan could expand the reach of services such as shopping.
"It's a fast pass for Yahoo to access Line's young users to expand its business, while Line can leverage a wide range of Yahoo services to become profitable," said Ryotaro Sawada, an analyst at Ace Research Institute.
SoftBank this month reported large losses connected to its investments in shared-office provider WeWork and other startups, prompting an expression of regret from Mr. Son, the billionaire tech investor who has poured money into Silicon Valley through his $100 billion Vision Fund. However, Mr. Son said he wouldn't shy away from making new investments.
Hurdles to the latest SoftBank deal include figuring out a power balance that satisfies both Mr. Son and Line parent Naver Corp. of South Korea. The person involved in the discussions said the sides are looking at an arrangement under which SoftBank and Naver would each own 50% of a new holding company. That company would in turn control Z Holdings Corp., currently Yahoo Japan's parent, with Yahoo Japan and Line operations housed separately under Z Holdings.
SoftBank wants to gain greater control of Line in years to come, the person said.
Another challenge is the two companies' focus on the Japanese market, where the population is shrinking and growth prospects are limited. The market for the services they offer -- such as texting, internet shopping and online financial services -- is already dominated in most other countries by larger rivals such as Amazon.com Inc. and Facebook Inc.
Still, analysts said the new entity, if designed well, could become Japan's first "super app," a gateway on smartphones for a broad range of everyday needs. That model has driven growth for China's Tencent Holdings Ltd. and Alibaba Group Holding Ltd. Tencent's WeChat app for chatting with friends spawned a payment service, WeChat Pay, that along with Alibaba's Alipay is now almost universally used for retail purchases in China.
Analysts described mobile payments as one of the most promising areas for the merger, but also hard to carry out. Yahoo and Line each have their own smartphone-payment platforms in Japan. Many others are competing for business too, forcing the companies to offer users generous bonuses.
Goldman Sachs analyst Masaru Sugiyama estimated that the operating loss at the payment app affiliated with Yahoo Japan would top $700 million this fiscal year, and he said Line's operating loss in noncore businesses including payments would be nearly as large this year. Line reported a net loss of Yen40 billion ($368 million) in the January-September period.
"Some hard work would be necessary for the two companies to merge their digital payment services before we see real synergy," said Morningstar Research analyst Kazunori Ito.
Yahoo Japan -- which no longer has a capital connection to the U.S. Yahoo website owned by Verizon Communications Inc. -- is an internet portal with more than 50 million users who tend to be older and check the site's retro-looking home page for news headlines. The company's recently announced acquisition of online fashion retailer Zozo Inc. was aimed at attracting younger users.
Write to Takashi Mochizuki at firstname.lastname@example.org