Alibaba Group, a prominent technology conglomerate in China, has announced its plans to monetize non-core assets and potentially relinquish control of certain businesses as part of its major overhaul following a regulatory crackdown. This decision comes after Alibaba’s shares plummeted by 70% due to the crackdown. CEO Daniel Zhang stated that the breakup of the company into separate businesses will enable each unit to become more agile and pursue their own initial public offerings (IPO).

The restructuring, which is the largest in Alibaba’s history, will transform the company into a holding company structure with six distinct business units, each having its own board of directors and CEO. Zhang explained that the focus will shift towards being more of an asset and capital operator rather than a business operator concerning these business group companies.

During a conference call with investors, CFO Toby Xu emphasized that the group would assess the strategic importance of each business and determine whether or not to retain control once they go public. This indication that Alibaba could divest its assets and sell control of business units comes more than two years after the Chinese government initiated a crackdown on its tech giants, targeting issues like monopolistic practices and data security.

Despite the restructuring, Alibaba will retain seats on the boards of the new business units in the short term. Zhang clarified that the restructuring had been in progress for a few years and is essential for the company’s survival. Following the investor call, Alibaba’s Hong Kong-listed shares experienced a 2.7% increase, settling at a 2.0% increase by afternoon trade after a 12% surge the previous day.

Under the new structure, each business unit will have the freedom to seek independent fundraising and pursue IPOs when they are deemed ready. Xu stated that the changes will take effect immediately, and the market will act as the test for each company’s financing and IPO plans. However, Alibaba will ultimately decide whether or not to retain strategic control of each unit after they go public.

In addition, Alibaba plans to continue monetizing non-strategic assets in its portfolio to optimize its capital structure. Xu noted that major competitor Tencent has already divested from several portfolio companies. Since 2020, Alibaba has made or announced 18 divestments.

The restructuring will not affect Alibaba’s share repurchase plan, according to Xu. The company introduced a $6 billion share buyback program in 2018, which has since expanded to $40 billion. CEO of MegaTrust Investment, Qi Wang, commented that strategic restructuring by internet firms like Alibaba and Tencent is necessary to combat regulatory challenges. Wang pointed out that these companies are implementing measures such as cost-cutting, divesting non-core businesses, and improving operating efficiency to mitigate regulatory risks.

Since the regulatory crackdown began in late 2020, Alibaba’s market valuation has dropped from over $800 billion to $260 billion. The restructuring aims to provide better protection for Alibaba shareholders from regulatory pressures, as penalties imposed on one division would not impact the operations of others. Ratings agencies S&P and Moody’s have deemed Alibaba’s restructuring as credit positive. However, S&P highlighted uncertainties regarding the division of existing resources and how the group will support businesses with significant cash needs. Some analysts believe that Alibaba is currently undervalued as a standalone conglomerate, and a breakup would enable investors to evaluate and value each business division independently.

Useful links:
1. CNBC: Alibaba to monetize non-core assets as it announces restructuring
2. Bloomberg: Alibaba shares jump after record restructuring targets separate IPO