Alibaba Overhaul: What to Know

Alibaba made the financial news headlines this week as its CEO, Daniel Zhang, announced a major overhaul of the business. The decision surprised market analysts, just a day after Alibaba’s founder Jack Ma made his first public appearance on Chinese soil in the last 12 months. 

Our blog will share with you some details regarding Alibaba’s reorganisation plans and what these could mean for investors.

What is Alibaba?

Alibaba (Alibaba Group Holding Ltd.) is a Chinese multinational technology company that uses its expertise in e-commerce to connect businesses and clients around the world. Jack Ma, a former English teacher, led the team of people who founded Alibaba in 1999 as a business-to-business (B2B) e-commerce marketplace website.

However, many things have changed since then, with Alibaba expanding to consumer-to-consumer and e-payment services, online shopping search engines, cloud computing etc. According to the Alibaba website, “our vision for fiscal year 2036 is to serve 2 billion global consumers, enable 10 million businesses to be profitable and create 100 million jobs.”

Alibaba overhaul: What’s the plan?

On March 28th, Alibaba’s management announced its decision to split the company into 6 business groups. According to the announcement, each business group will be headed by its own executive board. Each business will be able to raise funds and pursue an initial public offering (IPO) when market conditions are favourable.

The board’s members noted in a statement that it is “a move designed to unlock shareholder value and foster market competitiveness.” Alibaba’s shares surged right after the overhaul’s announcement, gaining 14% on Wall Street.

How will Alibaba’s $220 billion empire be split?

According to the company’s statement, the six new business clusters will be the following:

Cloud Intelligence Group: will include Alibaba’s cloud and AI services.

Taobao Tmall Commerce Group: will include China commerce activities such as digital marketplaces Taobao and Tmall, value-for-money platform Taobao Deals, community marketplace business Taocaicai, wholesale marketplace 1688.com and other businesses.

Local Services Group: will include navigation platform Amap, delivery service Ele.me and other businesses.

Cainiao Smart Logistics: will include the company’s logistics services.

Global Digital Commerce Group: will include international commerce businesses Lazada, AliExpress, Trendyol, Daraz and Alibaba.com.

Digital Media and Entertainment Group: will include Alibaba’s streaming and movie business.

Alibaba’s CEO: Businesses to become more agile

Alibaba’s CEO noted that “this transformation will empower all our businesses to become more agile, enhance decision-making, and enable faster responses to market changes.” Daniel Zhang told investors, “we’ve been stressing the idea of agility and being a more nimble and agile organization for several years now. Alibaba Group will be in the nature of a holding company that is the controlling shareholder of the business group companies. As the controlling shareholder, the Alibaba board will continue to have control over the boards of these new companies.”

What does Alibaba’s plan mean for investors and traders?

It is no secret that the company’s value has dropped by $600 billion since its peak in October 2020. Some market analysts suggest that the Chinese government’s crackdown on tech companies played a major role.

Economists see the overhaul announcement as a sign of change regarding Chinese tech companies noting that the move could be replicated by other major players in the market. After spending many months living abroad, Jack Ma’s return to China may be perceived as an olive branch as the Chinese government would like to strengthen the economy.

Alibaba’s Chief Financial Officer (CFO), Toby Xu, told shareholders that the company would continue to evaluate the importance of each company and “decide whether or not to continue to retain control.” He also reiterated that Alibaba's reorganization would not impact its share repurchase plan.

Is there a peace truce or is it just a fight for survival?

Asset managers speaking to Reuters said that “these internet firms are not going to just sit there and let regulation erode away their growth and profits. Companies including Tencent, Alibaba, JD, Didi and ByteDance have been making bottom-up changes to mitigate the regulatory risk, cost cutting (layoffs), improving operating efficiency, divesting non-core businesses.” According to the same Reuters report, “rating agencies S&P and Moody's said this week Alibaba's restructuring was credit positive.”

Commenting on Alibaba's overhaul plan, portfolio managers told CNBC reporters that Alibaba’s restructuring could be a sign of relief for investors as “the regulatory headwinds that we had in the past two years … that’s now becoming from a headwind to a tailwind. You have senior leadership blessing for unlocking value, and, to me, that is a fantastic indication where we are now essentially moving from regulation not being the issue that it was.”

In their note to investors, JP Morgan analysts compared Alibaba’s restructuring to Google/Alphabet’s transformation. “From an investor sentiment impact perspective, we liken Alibaba’s reorganization to Google’s transformation to Alphabet, a clear sentiment booster that should drive near-term stock price. Nonetheless, we believe Alibaba’s reorganization could bring about more significant implications to business fundamentals and share price over the mid-to-longer term,” they wrote in their report.

Economists at UBS noted that “spinning off units may help conglomerates lower potential regulatory risk, unlock trapped values at the conglomerate level, and reduce the regulatory risk discount conglomerates have faced.”

How can you mitigate risks when trading?

The large fall in Alibaba’s value in the last two years shows there are always risks when investing and trading. Trading isn’t easy if you are a beginner. Trading requires speed, calm thinking and thorough research. Beginner traders are more likely to make mistakes as they lack the necessary experience and patience and sometimes may engage in emotional trading. Building a trading strategy is also not easy as many factors could play a role in its eventual success or failure.

The best way to achieve your financial goals through trading is to boost your trading knowledge. Sounds difficult? No, it isn’t as a wide array of educational materials provided by brokers and prepared by various market experts is available. Learning how to use risk management tools when trading is imperative. Webinars, articles and blogs by seasoned traders can help you understand how to incorporate them into your strategy and mitigate risks.

Does trading on macroeconomic news interest you? Learn how this approach works with our free webinars. Meet and interact with expert traders. Watch and learn from live trading sessions.

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.