Alibaba’s Restructuring Plan Appeases Regulators, But Should Investors Buy Into The Hype?

Chinese e-commerce giant Alibaba has managed to excite investors by announcing plans to split itself into six smaller units, which would, in theory, help to unlock value for shareholders as each business can now pursue an independent listing or outside financing. But analysts are already questioning if the restructured businesses will deliver greater gains over the longer term.

The restructuring, which the Hangzhou-based giant calls the most significant governance overhaul in its 24-year history, is already underway, Chairman and CEO Daniel Zhang said in a Thursday morning call with analysts. He and other executives claimed that Alibaba would no longer be a business operator of each of the six companies. Instead, each unit will have its own CEO and board of directors. Although Alibaba is expected to retain control, at least in the initial phase, the e-commerce giant will need to decide later whether or not to pare down its stakes.

“Alibaba will become a holding company that is a controlling shareholder of each company,” Zhang said during the call, adding that there will continue to be synergies across the smaller units ranging from e-commerce to cloud computing and smart logistics.

Investors cheering the plan appear to be excited by the prospect of profiting from multiple initial public offerings, as the restructuring plan allows each business unit to create value by seeking outside financing. The change may also enable faster responses to market opportunities as each unit will have the authority to make its own decisions. Shares of Alibaba edged up another 2% in Hong Kong Thursday, after soaring more than 14% yesterday.

The plan’s most apparent benefit is that it helps to remove a long-time regulatory overhang. Breaking up the Chinese tech giant up is an obvious nod to anti-monopoly concerns that Alibaba had become too large and wielded too much market influence, after the company was fined a record $2.8 billion in 2021 for monopolistic practices. The restructuring also coincides with the return of billionaire cofounder Jack Ma to Hangzhou—which suggests that the formerly outspoken tycoon has given the plan his full support, says Kenny Ng, a Hong Kong-based securities strategist at Everbright Securities.

“If Jack Ma wasn’t in Hangzhou, then the market could harbor doubts that he didn’t even know or didn’t agree with the major restructuring,” says Ng. “The appearance of Ma also signals that no matter it is Alibaba or other private companies, they now highly comply with the regulatory policies.”

But some observers remain skeptical about the potential benefits for the individual businesses.

“Today’s analyst call provided a strikingly threadbare business rationale for the reorganization, and the talk of becoming more nimble and responsive was thoroughly unconvincing,” says Brock Silvers, a Hong Kong-based managing director at investment firm Kaiyuan Capital. “There may be occasional synergies between the six business units, but the intended goal was almost certainly to restrain Alibaba’s outsized market influence.”

Analysts say the immediate question is whether the smaller units can outperform their competitors over the long term. Alibaba will retain control of its core Chinese e-commerce business (namely its flagship Taobao and Tmall shopping sites), but those units had long generated cash that was used to finance other loss-making ventures, such as entertainment and local services units.

It isn’t immediately clear how much support the holding company will provide in the future, but the ultimate goal is for the units to list independently. There could be some “temporary pain” because the smaller businesses used to rely upon Alibaba, says Shawn Yang, a Shenzhen-based managing director at Blue Lotus Research Institute.

“No one knows which one will perform relatively well when they are all on the market,” Yang says.

He believes investors should be assessing each unit based on criteria like the percentage of external customers versus Alibaba-related customers, and their future market outlooks.

Yang says he is relatively upbeat on Alibaba’s international commerce business because additional financing can support its further expansion, but adds that the once fast-growing cloud computing unit still relies on customers from Alibaba-linked services. Yang also believes the Youku video platform may be facing an uncertain future. Alibaba first acquired a controlling stake in the platform back in 2016, but Youku has so far failed to make inroads in becoming one of the top three most popular platforms in China, losing users to Baidu’s iQiyi and Tencent Video.