In 2014, Alibaba, an already huge and still quickly growing Chinese e-commerce company, made its debut on the NYSE. Worth almost $22 billion it was, and still is, the biggest IPO in history. At the time, Alibaba was described as China’s answer to Amazon, rather ignoring the fact that it made most of its money through its wholesale B2B e-commerce platform, rather than AliExpress, the retail business.

All-time largest IPOs in the United States as of December 2022(in billion U.S. dollars)

Source: Statista

The choice of the USA for the Alibaba IPO, the company is now also listed on the Hong Kong Stock Exchange, was slightly controversial at the time. The official reasoning was access to the world’s wealthiest and most developed capital market. However, there were also strong suspicions founder Jack Ma also saw a New York listing as a good way to keep China’s meddling authorities at arm’s length.

The choice to first list on the NYSE first rather than on one of the major Chinese mainland exchanges or even Hong Kong turned out well. The company continued to grow its core wholesale and retail e-commerce businesses. It also diversified revenue streams with new businesses and minority stakes such as that in Ant Group, a financial services company spun out of Alibaba in 2014 and which Ma now runs full time.

By October 2020, Alibaba was one of the most valuable companies in the world, and China’s most valuable. Less than three years later, Alibaba is worth $273.7 billion – almost three times less. At its low point in late October last year, Alibaba was worth 80% or almost $700 billion less than it had been at its peak.

Why has Alibaba’s valuation dropped so much since 2020?

Alibaba’s valuation dropping last year would have been in keeping with the wider trend for growth companies. But the company’s valuation actually fell most a year earlier, in 2021. At the same time, the big American growth companies were in melt-up with valuations soaring.

Alibaba’s woes were not so much a reaction to the broader market or economic environment, as they were last year as they were to the perceived risk to China’s largest tech companies.

There was anyway growing discontent within China’s Communist government at what major players saw as the growing influence of the private sector’s biggest companies like Alibaba and Tencent and their owners. In a move to send a clear reminder of who is in charge and clip the wings of billionaire owners like Ma, in 2020 China embarked on a policy of sometimes seemingly random measures against parts of the tech sector.

There was a several-month period during which no new video games were approved for release, hurting Tencent which makes most of its money from mobile gaming and social media. The ride sharing and food delivery sectors, home to some of China’s other big tech growth stories were also hit by changes to legislation.

The hugely profitable edtech sector, particularly online tutoring businesses, was targeted in 2021. Described by the Communist Party’s Central Commission for Discipline Inspection as a social problem, several of the biggest companies in the sector were fined for false advertising, including Zuoyebang, which is part-owned by Alibaba. Companies were banned from making a profit selling out-of-school tutoring on the national curriculum.

One of the major triggers of the tech sector crackdown is seen as a 2020 speech given by Alibaba founder Jack Ma. Ma had already stepped away from his official roles at Alibaba in 2018 to focus on the CEO role at Ant Financial, a rapid growth financial services affiliate he spun out of the ecommerce giant.

At the time, Ant Financial, now Ant Group, expected to go public through the biggest IPO in history, besting the previous record set by Alibaba itself in 2014. Frustrated at the hoops China’s authorities were making Ant jump through to gain a license for its IPO, Ma made comments interpreted as attacking the country’s financial watchdog.

Many observers believe it was Ma’s speech that led China’s president Xi Jinping to order the country’s wealthiest businessmen and their companies to be brought to heel. Ant’s planned IPO was blocked indefinitely and Ma eventually chose to give up control of the company in January. Presumably it is hoped that will pave the way for an IPO to again become a possibility.

Alibaba splitting up

Yesterday Alibaba announced that it is to undergo the most significant corporate restructuring since being founded by Ma 24 years ago. The company will split into six business units, each with its own CEO and board of directors, and adopt a holding company management model.

Alibaba CEO Daniel Zhang, who replaced Ma when he left the role, said each company will be free to pursue its own approach to fundraising in the future, including possible IPOs. Listing as public companies would be expected to lead to the business units leaving the holding.

The six new companies in the Alibaba group will be:

Taobao Tmall Commerce Group – Alibaba’s China-facing domestic e-commerce marketplaces, including Taobao and Tmall which are the country’s biggest platforms. The businesses that will form this unit currently make up over two-thirds of Alibaba’s total revenue but have seen growth recently slow.

Global Digital Commerce Group

This business will include Alibaba’s international e-commerce marketplaces including AliExpress and Lazada which operates across much of Southeast Asia. Despite operating in highly competitive markets, these are some of the company’s fastest growing assets but currently account for just 8% of Alibaba’s revenue.

Cloud Intelligence Group

Amazon investors will be watching the success of the new Cloud Intelligence Group closely. The new unit will include Aliyun, China’s answer to AWS with a 36% share of the country’s cloud computing market.

The group will also host DAMO Academy, Alibaba’s R&D unit which is focused on chip technologies and AI. It will be headed up by current Alibaba CEO Zhang, who will also be CEO of the holding company.

Local Services Group

This unit will be home to all of Alibaba’s consumer-facing services apps including online groceries delivery app Ele.me, which has a 27% share of the Chinese market. The mapping app Amap will be one of those keeping it company and together currently account for 5% of Alibaba’s income.

Cainiao Smart Logistics Group

Cainiao was created back in 2013 as a result of several acquisitions of Chinese logistics companies. It both serves Alibaba and is also a major logistics provider on the wider market, accounting for 7% of group revenues.

Digital Media and Entertainment Group

This unit will start life as the smallest of the six but will still own some strong assets in the shape of Youku, which can roughly be compared to YouTube and the film production unit Alibaba Pictures. In 2019 its comedy movie Green Book, whose story revolves around a road trip, won the Oscar for Best Picture.

Why is Alibaba splitting up?

The company says that it is aiming for a more agile overall business that will speed up decision-making across smaller and more focused operations. A further incentive may be further disassociation from Ma, who left Alibaba in 2015 but remains its second-largest shareholder after Japan’s Softbank, with a 3.9% stake.

Ma is still seen as making a big contribution to major strategic decisions at Alibaba but the six new companies would be able to distance themselves from the holding company’s founder more successfully. Especially if they are eventually spun out via IPOs.

There are two directions of thought when it comes to why Alibaba has decided to break itself up now. The first is that it is a logical conclusion a now-sprawling conglomerate of 240,000 employees will be more efficient and agile if broken up into smaller, more focused independent business units. And that the fact the company feels in a position to make such a major announcement now means it believes the three year crackdown on the tech sector has come to an end.

The second is that the company and its major investors are still worried it may again become a target of Chinese authorities and are pre-emptively making a move that means no single company will be seen as big enough to represent a potential power to Communist Party control.

The reality may be that all of these factors were considerations and together presented a convincing argument for the restructuring. Markets have certainly responded positively with the Alibaba share price up 14% in New York on Thursday and 16.4% for the week.

Source: FT

There will be a belief that splitting the group up will unlock value. After the declines in share price over the past three years, Alibaba is worth roughly what it was in 2014 when it first went public. But when compared with other major Chinese tech companies on a price-to-estimated earnings bases for the current quarter, Alibaba looks significantly undervalued at the moment.

IPOs of the new units, especially of the cloud and logistics business, would be expected to raise significant sums of money that would benefit Alibaba shareholders. Even the prospect of future spinoffs and improved efficiency and growth is likely to spark a valuation recovery in the nearer term.

Last week’s restructuring announcement could well represent the moment that cements a phase of recovery for the Alibaba share price.