- Shares jump 14% after plan to break up conglomerate
- Six independent divisions with separate CEOs
- Investors cheer potential to unlock hidden value
Shares in e-commerce giant Alibaba (BABA:NASDAQ) leapt 14% in US trading and 13% in Hong Kong to a five-week high after announcing the biggest corporate shake-up in its 24-year history.
The US shares had lost more than 70% of their value since 2020 when the Chinese authorities began imposing curbs on the business.
The restructuring involves splitting the company into six separate divisions each with its own chief executive and board of directors and crucially, each division will be able to pursue its own fundraising including an IPO (initial public offering).
CEO Daniel Zhang will continue his role at Alibaba which will house the online retail platform Taobao Tmall Commerce Group and become CEO of Cloud Intelligence, the second largest division.
In a letter to staff seen by Reuters, Zhang said: ‘The original intention and fundamental purpose of this reform is to make our organisation more agile, shorten decision-making links and respond faster.’
WHY DID THE SHARES JUMP?
After years of increasing regulatory interference from Chinese authorities, investors see the latest move by Alibaba as a sign relations could be thawing and foster a more supportive stance from Beijing.
Secondly, once outside the shackles of the current conglomerate structure the independent businesses should have a better chance of flourishing and potentially unlocking hidden value.
Investment director Russ Mould at AJ Bell commented: ‘Often corporate reshuffles act as a catalyst for the share price on the basis that the individual parts of the business are worth more than the whole company.
‘It is also worth noting that Alibaba’s e-commerce arm is the most profitable part of the business. Its top Chinese online marketplaces, Taobao and Tmall, do not take on any inventories.
‘Instead, they act as paid listing platforms that link buyers to sellers, with its logistics unit Cainiao fulfilling orders. This keeps the amount of money it has tied up in the business low and supports strong margins.
‘Allowing the core commerce operations to stand alone rather than subsidising other growth ventures, in areas like cloud computing, digital media, entertainment and technological innovation, could enable it to achieve a higher price tag on the market.’
Disclaimer: Financial services company AJ Bell referenced in the article owns Shares magazine. The author of the article (Martin Gamble) and the editor of the article (Daniel Coatsworth) own shares in AJ Bell.
