The perks and pitfalls of depending on Jack Ma
By John Foley
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Buy a share in Alibaba and you place your trust in Jack Ma. The Chinese e-commerce giant’s founder, executive chairman and spiritual sultan will remain a controlling force even after the company completes its massive initial public offering later this year. The $100 billion-plus question for prospective shareholders is whether they can depend on him to always act in their best interests.
Given Alibaba’s success, the question may sound absurd. Under Ma’s leadership, the Hangzhou-based retail marketplace has grown into a colossus. Almost 85 percent of China’s e-commerce activity passes through its Taobao and Tmall platforms. Revenue in the first quarter of 2014 increased 39 percent to 9.4 billion yuan ($1.5 billion). When the long-awaited IPO debuts in September, it could be one of the largest ever, likely surpassing the $16 billion raised by Facebook in 2012.
But the company and Ma are at a turning point. After years of expanding its market share, Alibaba is now under attack from Chinese rivals like JD.com, which resembles Amazon. The group is straying into new areas from mobile messaging and maps to cable TV and football. It has spent at least $7.3 billion on acquisitions since January 2014. What Alibaba’s leader does next is integral to the company’s value.
Ma’s influence outweighs his 8.9 percent shareholding and his official title. Besides being Alibaba’s public face, he heads a committee of 27 partners that collectively nominates more than half the company’s board of directors. Shareholders can veto each choice, but then the partners can shoehorn in an alternative until the following year. Yahoo and Japan’s Softbank, which together could own over 50 percent of the company’s stock after the IPO, have already agreed to back the partnership’s decisions. In practice, this means outside investors will have almost no say over how the company runs.
That might not matter, except that Ma’s motivations are not quite the same as those of other shareholders. Ma personally holds some of Alibaba’s key licences through vehicles called variable interest entities (VIEs) that are necessary to get around China’s foreign-ownership rules. He also controls the vehicle that owns the company’s Alipay payment unit and its money-market fund affiliate. These businesses are not part of the IPO, but are entwined with Alibaba through a series of complex agreements, raising the potential for conflicts of interest.
Ma’s record doesn’t offer much reassurance. In 2011 he shifted Alipay out of Alibaba’s control. The reason was to ensure it got a vital licence from the central bank. But the transaction highlighted a pillar of Ma’s philosophy: sometimes tough, unpopular decisions must be made at a moment’s notice.
Other perplexing decisions seem less necessary. Take the impulse purchase of a stake in a Chinese football team. Another investment in a mainland cable TV company involved Alibaba lending cash to one of Ma’s co-founders. And in other deals, the private equity fund Ma founded has popped up as a co-investor. As the company grows, the possible transactions Alibaba could consider also get bigger: tilts at Yahoo or even eBay are in the realm of possibility.
Investors are also taking on Ma’s political persona. Alibaba has overcome obstacles that kill off many non-state companies. One reason is that the entrepreneur enjoys lashings of support from Beijing, making him a kind of political shock absorber. The company’s base in Zhejiang puts Ma in the orbit of China’s president Xi Jinping, formerly the province’s party chief. And one of Alibaba’s investors is a fund founded by the son of former premier Wen Jiabao, the New York Times reported on July 21. Ma understands the opaque rules that govern China’s system of licences and permissions, and the importance of championing consumers and small businesses. Alibaba supports almost 12 million jobs.
One risk is that Ma’s star ascends too rapidly. The ruling Communist Party loves a Chinese success story, but hates a cult of personality. Ma has compared his situation during the Alipay controversy to that of Deng Xiaoping, China’s paramount leader, as he sent tanks into Tiananmen Square to crush democracy protesters in 1989. And it’s not just politicians that might bristle at Ma’s ambition. In the financial world, Alibaba’s push into online investment funds is a direct challenge to state banks, which make for powerful enemies.
A backlash could take many forms. Alibaba’s effective monopoly over online retail makes it a potential target for antitrust scrutiny. Alibaba’s VIEs, meanwhile, have questionable legal status in China. Shutting down the country’s favourite e-commerce operator would be unthinkable, but forcing it to restructure so that foreign shareholders must sell out, or a state investor brought in, is conceivable.
What would Alibaba look like without Ma? It’s more than a hypothetical question for a company that says it wants to endure for at least another 87 years. The succession plan is not clear, even though the 49-year old Ma already faces other demands on his time from philanthropic activities and ambitions to help clean up China’s environment.
Alibaba’s founder is arguably modern China’s most successful entrepreneur. But he has also made little secret of where his priorities lie: “customers first, employees second and investors third.” So far, the incentives of those three groups have been aligned. If that changes, investors could find themselves powerless. Buying a share in the upcoming IPO is a vote of confidence in Jack Ma, but one that should come with hefty caveats.