You might recall the big business story in the week of the fiercest-fought US presidential election that pitted the then-President Donald Trump against challenger Joe Biden in November 2020. Beijing abruptly pulled the plug on the Hong Kong and Shanghai dual listing of fintech giant Ant Group which was being touted as the “mother of all IPOs” at a valuation of over US$350 billion.
Hours before the listing to raise US$34 billion was yanked, there were media reports of Ant’s shares being traded in the grey market at a 25% premium or a valuation close to US$430 billion, making it more valuable than world’s biggest bank JP Morgan and oil behemoth Exxon Mobil.
At the time, Ant was 33% owned by Chinese e-commerce giant Alibaba Group Holding; 34% by Alibaba’s founder Jack Ma, his family and family-linked charities; and the remaining by other investors. Since then, Ma has cut his stake in Ant to just 6%, while his personal stake in the listed Alibaba has been cut to just 3.9%. Sanford Bernstein & Co now values the still private Ant Group at just US$90 billion ($119.6 billion), or down 74% from the reported IPO valuation in late 2020. Alibaba, which had a market capitalisation of nearly US$880 billion at the peak, is now valued at US$260 billion, or down 70%, despite the 15% bump it got this past week.
Beijing regulators did not just nuke Ant Group’s mammoth IPO. They put a squeeze on China’s once-burgeoning tech sector. The crackdown wiped off more than a combined US$1 trillion from the country’s biggest tech firms including Alibaba; superapp WeChat owner Tencent Holdings; e-commerce players JD.com and Pinduoduo; food and grocery delivery firm Meituan; search giant Baidu; tech hardware maker Xiaomi; ride hailing firm Didi; social media players Weibo and Bilibili; as well as privately held short video supremo TikTok’s owner, Bytedance. Combined revenue at China’s internet firms shrank by 1% to US$212 billion in 2022, the first time it has ever contracted on record. Just four years ago, they were growing at over 35% annual clip.
Cracking the whip
China had reasons to crack the whip. Beijing was concerned that a handful of tech firms, harnessing data from consumers, corporations and even state enterprises, were growing too fast, too big and too powerful. To rein them in, Beijing imposed huge fines on Alibaba, Tencent, Meituan and others. The biggest fines were under the country’s stringent Anti-Monopoly Law. Over the past 18 months, Beijing has introduced a slew of new regulations to further rein in its biggest tech companies, from data protection to how the tech giants can use algorithms.
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Yet, in the aftermath of prolonged Covid lockdown, China’s economy is still reeling. Officially GDP growth for 2023 is forecast at around 5%, but senior Chinese officials have been hinting even that will be a difficult target to meet. Private-sector economists predict GDP growth at closer to 4% this year, with prospects for lower growth rates for longer as China’s demographic problems weigh on its economy. United Nations estimates China’s total population could fall by between 100 million and 200 million by 2050.
It is not surprising then that Beijing is keen on revving up its pre-Covid engine of growth: Big China Tech.
Beijing also realises that it needs to nurture its homegrown tech champions like Alibaba, as tech and digital economies of China and the West are split and the US has banned export of high-end semiconductors that threaten to hold back China’s advance in key areas of technology. If Beijing is to catch up with the West on technology, particularly semiconductors, it cannot afford to chain its own tech champions. It needs them to grow and help Team China. Beijing is also keen on getting its national torch champions like Baidu and Alibaba to push forward in artificial intelligence (AI) technology, at a time when new tools such as ChatGPT and other generative AI are appearing in the West and poised to reshape the global tech industry.
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A week ago, Alibaba founder Ma, who had spent the last two years hiding, golfing in Hainan, watching muay thai fights in Bangkok and relaxing in hot springs or ski resorts in Japan, quietly returned to Hangzhou where Alibaba has its headquarters. On March 28, Ma was at a private school in Hangzhou. A day later, Hong Kong’s daily, the South China Morning Post, which Alibaba acquired for US$266 million in late 2015, reported Alibaba Group plans to split its empire into six independently run units that will each raise funds on their own and explore initial public offerings (IPOs).
The moves were intended to “unlock shareholder value and foster market competitiveness”, Alibaba CEO Daniel Zhang says in a letter to company staff. “Only by self-reform can we create the future.” Referring to the plan as a “transformation”, Zhang says it would help make Alibaba “more agile, enhance decision-making, and enable faster responses to market changes”. Zhang hopes the latest round of corporate governance reforms will “redefine and structure the governance relationship between Alibaba Group and its various businesses”.
Alibaba’s six units include the high-growth cloud computing and intelligence group, which includes its efforts in AI; a global digital commerce arm that includes Southeast Asian e-commerce group Lazada; a unit focused on digital media and entertainment; a local services business Ele.Me; the Cainiao smart logistics division; and and its core Taobao and Tmall e-commerce business. “The new structure leads to flexible and leaner management, supported by its middle and back-end infrastructure,” says Thomas Chong, China Internet analyst at Jefferies & Co.
Each of the six units will have the flexibility to raise outside capital and seek IPOs, with the exception of Taobao and Tmall, which will remain wholly owned by Alibaba. Daniel Zhang will remain chairman and CEO of the holding company in addition to running the cloud division. Zhang only became AliCloud’s president in December. Other units will get their own CEO and their own board of directors. “The market is the best litmus test, and each business group and company can pursue independent fundraising and IPOs when they are ready,” Zhang says.
BabyBells and Alibabies
Think of the new Alibaba Group Holding as Berkshire Hathaway, the holding company of billionaire investor Warren Buffett and its independent divisions like Burlington Northern Santa Fe railway or NetJets, Berkshire’s private jets firm. They are both controlled by Berkshire but run autonomously with very little interference from the holding company.
Let’s call the six new Alibaba firms Alibabies. After all, when “Ma Bell” AT&T was forced to split itself, the spinoffs were dubbed “BabyBells”. Moreover, Ma Jack, the Mother of all things Baba, has a penchant for naming just about everything Ali. Alizila is its news hub, AliExpress is online retail service, AliCloud is cloud services entity, open-platform intelligent personal assistant is called AliGenie, music service is AliMusic, and its VC arm is named AliVenture. Oh, there is also the payment service AliPay.
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A former school teacher in Hangzhou, Ma launched Alibaba in 1999, inspired by US online retailer eBay. Over the years, Alibaba has morphed into a humongous marketplace like Amazon.com. Ma named his e-commerce firm Alibaba after an old Arabian tale that had been added to One Thousand and One Nights in the 18th century. “It is an easy-to-remember name and known globally,” Ma told a TV interviewer at the time of Alibaba’s IPO on the New York Stock Exchange in 2014, which raised a record US$24 billion.
Though it started as an e-commerce marketplace, Alibaba has grown into a large and unwieldy next-generation digital conglomerate. From media — including movies, videos, music and a newspaper — to food delivery, logistics, warehouses, cloud services, physical retail as well as e-commerce, both in China and overseas, Alibaba has its finger in far too many pies, with its venture capital arm taking stakes in early- and late-stage start-ups and a private equity firm taking stakes in established listed and privately held businesses.
There is a time to bulk up and a time to break it up. A lot of conglomerates over time realise that they can add more value if they can separate their sprawling business units and provide each of them with some independence, giving them room to grow. Just this past year, General Electric, the biggest conglomerate in the US, broke itself into three units — GE HealthCare, GE Aviation and the yet-to-be-listed energy arm GE Vernova. Another conglomerate, United Technologies, chose a similar route, breaking up into aerospace firm named United Technologies; an elevator and escalator maker named Otis; and Carrier, the leading maker of heating, air conditioning, refrigeration, and fire and security technologies. As Alibaba’s stock has languished, even some of its biggest fans have grudgingly acknowledged that there has not been the sort of synergies between the various segments of Alibaba that Ma and his team had hoped for when they were putting the group together.
The pending six-way split will potentially allow investors to value all other business segments of Alibaba independently. That in turn will help shield Alibaba’s shareholders from regulatory pressures. For example, penalties levied on its e-commerce businesses Taobao or Tmall or its AliCloud business will not have any impact on the operations of its food delivery business, Ele.Me.
Don’t look for Alibaba to spin off the Alibabies in IPOs anytime soon. The process of independent units operating on their own, funding themselves, and then figuring out the best possible time to do an IPO, will take time. Analysts I have spoken to say they believe it will be at least 18 months to two years before we see the first Alibaby spinoff or IPO.
As for Alibaba’s stock price, there is likely to be another bump as more news leaks out before the market waits to see what exactly is in each of the Alibabies and what they are really worth on their own. Until then, conglomerate Alibaba will continue to grow steadily but more slowly than it has in the past. Bernstein’s analyst Robin Zhu see 5.6% annual revenue growth over the next two years and 11.2% net earnings growth.
One big bone of contention for investors has been Alibaba’s variable interest entity (or VIE) structure. Investors in Alibaba do not legally own a piece of the company but an economic interest in the VIE. Chinese firms seeking to list overseas set up an offshore entity for overseas listing purposes that allows foreign investors to buy a piece of ownership in them. VIE structures were designed by investment banks to help firms like Alibaba skirt Beijing’s rules restricting foreign investment in a number of sensitive industries such as media, telecommunications and internet.
Most Chinese firms listed overseas now have dual listings in Hong Kong or Shanghai. Alibaba and its peers are now considering changing their overseas listings to merely secondary listings. That will make it easier for regulators in Beijing to allow all of Alibaba, rather than just the variable interest entity, to have a primary listing in Hong Kong or Shanghai.
In the end, it will all be about the sum of Alibaba’s parts. Bernstein’s Zhu values all of Alibaba’s parts at around US$164 a share. That is 64% more than the closing price on March 29, but less than half of what Alibaba was worth at the peak.
Assif Shameen is a technology and business writer based in North America
