For Alibaba, Six Is Bigger Than One—And a Smaller Target

FILE - The logo of Chinese technology firm Alibaba is seen at its office in Beijing, Tuesday, Aug. 10, 2021.   Alibaba is separating the company into six business groups as it looks to react faster to market changes and increase their value. Alibaba Group Holding Ltd. said, Tuesday, March 28, 2023, in a regulatory filing that it will be split into the Cloud Intelligence Group, Taobao Tmall Business Group, Local Services Group, Global Digital Business Group, Cainiao Smart Logistics and Digital Media and Entertainment Group. (AP Photo/Mark Schiefelbein, File) (AP)
FILE - The logo of Chinese technology firm Alibaba is seen at its office in Beijing, Tuesday, Aug. 10, 2021. Alibaba is separating the company into six business groups as it looks to react faster to market changes and increase their value. Alibaba Group Holding Ltd. said, Tuesday, March 28, 2023, in a regulatory filing that it will be split into the Cloud Intelligence Group, Taobao Tmall Business Group, Local Services Group, Global Digital Business Group, Cainiao Smart Logistics and Digital Media and Entertainment Group. (AP Photo/Mark Schiefelbein, File) (AP)

Summary

There are good reasons to think a split-up Alibaba would be more valuable. In this case, politics and profits are pointing in the same direction.

Six is bigger than one. Simple arithmetic, but that’s also the market verdict for Alibaba’s plan to split itself into six units. The market may or may not have it right on the nitty-gritty numbers—but the political dividend could be just as important.

Shares of the Chinese e-commerce giant rose 14% in New York on Tuesday, adding $33 billion to its market value. Alibaba said Tuesday that it will restructure the company into six independently run companies—each with its own CEO and board. Those will include Chinese commerce, global e-commerce, cloud computing, local services, logistics and entertainment. The core Chinese e-commerce business will stay wholly owned by Alibaba but each of the other units could seek their own funding, and maybe eventually conduct initial public offerings.

The hope is that by separating the businesses into distinct units, the market will find it easier to assign individual value to each of them, especially if some of them go public. Analysts from Goldman Sachs and Morgan Stanley have both said the market is currently valuing Alibaba’s businesses outside its core Chinese e-commerce segment at zero.

That’s why analysts have taken a “sum-of-the-parts" approach to assess how much the company should be worth after splitting into different pieces. Cloud and global e-commerce are the segments that show the most promise and many analysts think they are the most valuable outside of Alibaba’s core business. Local services like food delivery, on the other hand, are burning cash and may still be for a while. Alibaba is trading at 11 times forward earnings, compared with its five-year average of 22 times, according to S&P Global Market Intelligence.

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But the really crucial question is whether the separation will spur improvements in Alibaba’s actual operations too. Making individual businesses responsible for their own performance—each of the units will provide their own stock-option plan for employees, for example—may push some underperforming businesses to cut costs and find new revenue sources.

Alibaba’s core Chinese commerce business, which accounts for around two-thirds of Alibaba’s revenue, was the only business out of the six to report an operating profit last year. Without the crutch provided by that cash cow, Alibaba’s other businesses will need to fight harder for efficiency and profits. Alibaba’s core e-commerce business, on the other hand, would have more cash to either fight off the competition—which has been gaining at its expense—or deliver higher shareholder payouts.

The split may also help reduce regulatory scrutiny after a long period when Alibaba-affiliated businesses like Ant Group became the main boogeymen targeted by Beijing’s crackdown on powerful private-sector internet technology companies starting in late 2020. Alibaba’s shares have lost more than two-thirds of their value since the regulatory crackdown began. Regulators made clear that alleged anticompetitive practices were one major reason for the campaign—so splitting up the company is a direct nod to those concerns, particularly if some of the noncore businesses are eventually sold.

From that perspective, the move does look like a win-win. It may or not may not deliver long-term value to shareholders in the form of better operating performance—that will depend heavily on whether individual units really are ultimately sold off, and on whether they can adapt to a very different political and business milieu, both within China and without, than in the prepandemic era they grew up in.

But at the very least it may help finally get Beijing off their back and set the stage for further growth in the core e-commerce business, which does look very cheap by historical standards. Sometimes the right politics have a clear value all their own.

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