Alibaba’s overhaul: a ‘smart’ move after China crackdown
By AFP
March 29, 2023
Alibaba has said it will split its $220 billion empire into six businesses
Alibaba, China’s biggest e-commerce company, has announced plans to split its business into six groups, in one of the most significant overhauls of a leading Chinese tech firm to date.
Below is what we know about this major shake-up:
What is happening to Alibaba?
Alibaba has said it will split its $220 billion empire into six businesses: focusing on logistics, cloud computing, entertainment, e-commerce, and two others offering services to global businesses.
Its logistics arm, Cainiao, helped deliver Chinese vaccines around the world during the Covid-19 pandemic.
Its cloud computing service was seen as a rival to Amazon until last year, when the Chinese government suspended a partnership with Alibaba, saying the company failed to quickly address cybersecurity vulnerabilities.
The entertainment unit runs Youku, one of China’s biggest online video-sharing platforms.
Each unit will be managed by its own CEO and board of directors, allowing them to raise their own funds and pursue public listing plans separately.
Alibaba itself will only retain full ownership of its China e-commerce unit, Taobao Tmall Commerce Group.
The company described the restructuring as the “most significant” organisational overhaul in its 24-year history.
“The market is the best litmus test, and each business group and company can pursue independent fundraising and IPOs when they are ready,” CEO Daniel Zhang said.
What’s behind the overhaul?
Dividing the monolith into smaller units could make Alibaba more nimble and help insulate parts of the business from government crackdowns, analysts said.
“Revenue in Alibaba’s core e-commerce business declined last year, because pressure from competition was… high,” said Li Chengdong, founder of Dolphin, a technology-focused think-tank in Beijing.
“By splitting up, Taobao actually becomes a little lighter and can cope with… new types of competition.”
Alibaba has been a prime target of China’s regulatory crackdown, prompted in part by Beijing’s fears that too much power and capital had been accrued by a small number of tech behemoths.
“Splitting things up is a smart move,” said Jeffrey Towson, partner at Techmoat consulting.
“Now (Alibaba) won’t be seen as such a dominant, solitary player,” he added.
“If there is a political issue with one part, it won’t hit the rest of the business.”
Why is it happening now?
Signs now suggest the crackdown from regulators may be easing.
Officials at China’s annual rubber-stamp parliamentary session this month pledged more support for the private sector, ravaged by almost three years of harsh Covid restrictions.
Alibaba’s overhaul comes as its talismanic co-founder, Jack Ma, returned to China this week after an extended absence from the public eye.
Ma has kept a low profile since late 2020, when a speech he made attacking Chinese regulators was widely believed to have provoked Beijing into pulling a mammoth IPO by Alibaba’s affiliate Ant Group.
In January, Ant Group said Jack Ma no longer held controlling rights in the company — a move analysts speculated might have helped pull Ant and Alibaba out of the regulatory doghouse.
Will others follow suit?
Chinese tech shares rallied in Hong Kong on Wednesday on speculation that other big players could follow Alibaba’s example.
The tech giant’s fate has been held up as a cautionary tale for others also caught in Beijing’s crosshairs — and its restructuring plan could serve as a template for its peers.
“Investors could get hyped on the positive side in the short term,” Willer Chen, senior research analyst at Forsyth Barr Asia Ltd, told Bloomberg News.
“Alibaba’s shakeup plan may also lead investors to think of the potential for other tech firms like Tencent to follow suit.”
According to Towson, Alibaba has always been “ahead of the curve”.
“Many are looking at whether other companies will now follow its path. But I don’t know of anyone doing it right now.”
Instant View: Alibaba to split into six units
(Reuters) - Alibaba Group Holding Ltd said it plans split its business into six main units covering e-commerce, media and the cloud, adding that each will explore fundraising or initial public offerings.
Alibaba's U.S.-listed shares rose 7% in pre-market trading.
Here are comments from analysts: THOMAS HAYES, CHAIRMAN AT GREAT HILL CAPITAL, NEW YORK
"This is the ultimate value unlock and this is going to enable the sum of the parts valuation to be realised much more quickly as you'll have faster growing business segments that will ultimately be awarded much higher multiple by the market when they're either IPO or spun to shareholders.
"It also takes any residual regulatory overhang off the table as six smaller species pieces can fly under the radar, versus one behemoth."
OSHADHI KUMARASIRI, ANALYST AT LIGHTSTREAM RESEARCH, WHO PUBLISHES ON SMARTKARMA
"I think Alibaba is pursuing easier regulation by splitting its business into six entities. This could potentially allow each entity to operate under a more manageable regulatory framework, rather than having one large entity that may be subject to more stringent regulations.
"It is likely that the geopolitical risks associated with Alibaba will persist as long as the tensions between China and the U.S. continue to exist. However, this split would allow investors to pick and choose areas where that risk is at the lowest."
SUSANNAH STREETER, HEAD OF MONEY AND MARKETS AT UK-BASED HARGREAVES LANSDOWN
"The break-up would allow Alibaba to raise external investment and grow its cloud business. Alibaba would be able to more easily unlock value in the cloud business and be less weighed down by the more cumbersome nature of a sprawling empire."
"Hong Kong would be the priority (for IPOs), given how things stand at the moment."
DANIEL TU, FOUNDER OF ACTIVE CREATION CAPITAL, HONG KONG
"Alibaba has suffered a couple of tough years and faced slowing economic growth at home. That has resulted in considerable losses in its share price and valuation. Furthermore, it has struggled with growth in the past few quarters. Therefore, the reorganisation is an attempt to reinvigorate growth.
"With Jack Ma and many of the original partners no longer with the company, the question for some will be whether the culture and resiliency the co-founders once built are still embedded in today's leadership team in order for them to successively carry out the reorganisation and the long-term competitiveness of the six business units."
ALFREDO MONTUFAR-HELU, HEAD OF THE CONFERENCE BOARD'S CHINA CENTRE, BEIJING
"From Alibaba's side, the restructuring will do a lot in terms of clearing the way for it to continue growing. Each of the six units operate in different areas, and therefore must respond to different sets of regulations.
"For instance, separating the logistics business from the cloud business should be better for the former because the data security requirements on cloud are stricter. And of course cloud business executives are better placed at responding to these requirements."
ART HOGAN, CHIEF MARKET STRATEGIST AT B RILEY WEALTH, BOSTON
"When you get to a certain size and have multiple different disciplines inside your business model, it's hard to have ascribed the value that would be the sum of the parts.
"Alibaba planned to split into six different units to ascribe an appropriate value to each of its different units; likely makes sense if they're able to pull this off."
XIAOYAN WANG, ANALYST AT 86RESEARCH
"We believe that the separation of Alibaba's businesses is a good thing for its stock price as it will unlock value and make each business more flexible and competitive.
"As for regulation, we think it's also a positive development. After the businesses are spun off from Alibaba, the regulatory risks they face may actually decrease, rather than being subject to Jack Ma's personal risk. This will make it easier for investors to assess regulatory risks more clearly."
DAVID BLENNERHASSETT, ANALYST AT BALLINGAL INVESTMENT ADVISORS
"This somewhat mirrors Alphabet's path, in which it also became a Holdco for a number of operations. Sounds like a sound practice for the siloed ops to independently carve out their own brand/narrative, if you will, IPO and uplift funds to the parent.
"Although this may provide added granularity to Alibaba's various businesses, it doesn't necessarily translate Alibaba is more attractive if it continues to control each segment - or holding minority/equity-accounting stakes and the market assigns discounts on discounts.
"I do wonder if there is some regulatory angle here, ringfencing some outfits that may face greater scrutiny. Interesting timing as this announcement coincides with Ma visiting China again."
STUART COLE, HEAD MACRO ECONOMIST AT EQUITI CAPITAL, LONDON
"I am not sure how quickly Alibaba could be broken up. I am sure they have done some work on this before announcing it, but it seems quite a large job to create six companies out of one. But it does inject an element of flexibility and adaptability into the company, which currently is something of a behemoth.
"And it will allow the more successful of the six new companies to potentially raise finance more easily and cheaply than the parent company can as they will not be burdened by the slower, less profitable parts of the business. So for investors, they get the opportunity to put their funds in the parts they like whilst avoiding the parts they do not, unlike the current situation.
"It does seem something of a coincidence that this is happening just as Jack Ma seems comfortable returning. To me, it suggests something that Alibaba has been wanting to do for some time, but has been waiting for the opportunity to do so."
KENNY NG, STRATEGIST AT CHINA EVERBRIGHT SECURITIES, HONG KONG
"It releases additional value. With this expectation, investors will be more positive on Alibaba. It may reflect a new round of development for the business and reduce worries of regulatory issues."
(Reporting by Yuvraj Malik, Selena Li, Eduardo Baptista, Johann Cherian, Scott Murdoch, Shashwat Chauhan, Josh Ye, Kane Wu and Tom Westbrook; Compiled by Anshuman Daga; Editing by Louise Heavens, Andrew Heavens and David Goodman)
No comments:
Post a Comment