Alibaba bets on division to survive – 03/31/2023 – Market

The last time Alibaba made a radical move to reorganize its business, the Chinese tech group set off a chain of events that led to a clash with regulators, the disastrous cancellation of what would have been the world’s largest initial public offering and the Beijing crackdown on Big Tech.

This time, Alibaba hopes to please investors and Beijing bureaucrats with a major restructuring across six business units, announcing the biggest revamp of China’s best-known e-commerce company since Jack Ma founded it 24 years ago.

In 2020, a speech by Ma attacking China’s financial watchdogs and banks led to the abandonment of its $37 billion initial public offering by Ant Group, its fintech affiliate. It was a trigger for President Xi Jinping’s campaign to reduce the influence of the country’s biggest tech companies.

This week’s decision by Ma’s successor as chief executive, Daniel Zhang, could make Big Tech look smaller to Beijing. It is sharing a conglomerate with 240,000 employees – twice as many as its main rival, Tencent – and a smorgasbord of lines of business ranging from groceries to cloud computing.

The empire’s expansion has left Chinese officials regretting letting it grow so large, and Wall Street investors second guessing how to properly value it. With nimbler rivals eating away at their market share, Alibaba executives led by Zhang began to fear that they, too, had lost control.

“We need to figure out how to really make the organization simpler and more agile, and I think that starts at the top,” Zhang told officials in a video message broadcast by state media. “With these changes, everyone can define strategies to suit their respective battlegrounds.”

One obvious intended beneficiary is Alibaba’s stock price, which is stagnant around where Ma landed his first New York trade in 2014. Investors are betting the reorganization will unlock value: Alibaba shares jumped 14% in New York York on Tuesday (28).

“Alibaba is a collection of disparate companies run by a single board of directors, a pure conglomerate, and is now moving in the direction of breaking up into fully independent companies,” said Jesse Fried, an expert on corporate governance at Harvard. “They’re unlikely to go all the way because management won’t want to completely relinquish control.”

But Fried said even the restructuring outlined so far should improve operations, allowing for more focus. It should also lead to higher valuations, making it easier for investors to assess the value of individual business units.

With the restructuring, Alibaba’s six business groups will be dedicated to domestic and international e-commerce, cloud computing, local services, digital media and logistics. Alibaba will retain full ownership of the Chinese e-commerce unit, which includes shopping sites Tmall and Taobao and last fiscal year generated more profits than the group as a whole.

However, at its headquarters in Hangzhou, some employees who spoke to the Financial Times feared the plan would mean job cuts, particularly in unprofitable business units that have been kept afloat by cash-guzzling online sales platforms.

“This does not bode well. Many companies will not survive outside the Ali system, they rely on support from other units,” said an Alibaba executive at a loss-making unit. “This is a huge task with little time, there are also many transactions between the parties to resolve.”

An American investor in Chinese technology, who asked not to be identified, pointed out that some lines of business may close. “Money generated by e-commerce is used in other businesses … there will be no engine to power the other businesses,” the person said, arguing that the company was stronger as a whole than individual units.

It remains unclear to what extent Zhang will split Alibaba. For now, the group has indicated that it will retain control of the six units through a holding structure. The revamp will place chief executives and boards in each unit and lead to some of the “Baba Babies” going public separately.

Analysts expect one of the first units to attract more foreign investors to be Cainiao, a logistics group that does everything from delivering dresses or EarPods in Shanghai to shipping products bought on AliExpress, the group’s international commerce platform, to Paris. .

In the December quarter, Cainiao was the group’s fastest growing line of business, with sales 27% higher than the previous year, and was operating at close to break-even.

Alibaba’s cloud computing unit could also attract outside interest as its business recovers after the end of China’s “Covid zero” lockdowns. Zhang took direct control of the unit in December.

“Cloud and Cainiao are the two entities that offer the clearest value,” said Bernstein’s Robin Zhu.

But he cautioned that an IPO for any of the units is likely far off. “The market seems to expect spin-off announcements in the very near future,” said Zhu. “This is not a spinoff from Alibaba in the sense that we’re going to have Alibaba IPOs from one to six.”

Other units in the group may face greater challenges. Local services, which include food delivery and a map app, as well as the group’s international trade businesses, operated with negative Ebita margins in the December quarter.

The restructuring puts Alibaba on the path of e-commerce rival JD.com, which has maintained control by expanding its logistics, fintech and healthcare businesses. JD’s logistics and healthcare businesses first raised capital from outside investors, including a politically connected private equity group linked to the son of China’s most powerful financial official, Liu He, and then went public in Hong Kong.

“Most investors generally don’t see what JD has done with the spin-offs as a significant gain,” Zhu said. “JD companies outperformed in 2021, but this was driven primarily by business growth rather than IPOs.”

Chinese antitrust regulators have been scrutinizing Alibaba since Ma inadvertently sparked the tech crackdown more than two years ago, hitting the group with a record fine for monopolistic behavior and handing it additional penalties for failing to seek acquisition approval.

Alibaba executives this time kept authorities well informed about its restructuring plans and found a receptive audience, said two people involved.

A regulator in Alibaba’s hometown said Beijing would encourage public offerings for any of the group’s units, including the two most likely to attract investors, the cloud and logistics businesses. The official said it would also make sense for Alibaba to receive outside capital for its T-Head semiconductor unit. “Now is a good time for T-Head to bring in more funds and get more support,” the person said.

Alibaba wants to avoid repeating the saga of Ant, which has been in limbo for more than two years and has yet to complete the overhaul demanded by Beijing. To appease regulators, Ma opted to give up control of Ant in January, a move that under Hong Kong’s listing rules will delay an IPO for at least a year.

Ma himself returned to China this week for a rare public visit — a trip that an Alibaba official said was intended to show support for Zhang as he navigates the latest restructuring.

Translated by Luiz Roberto M. Gonçalves