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‚Äôs 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‚Äôs success, the question may sound absurd. Under Ma‚Äôs leadership, the Hangzhou-based retail marketplace has grown into a colossus.¬†Almost¬†85 percent of China‚Äôs 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‚Äôs leader does next is integral to the company‚Äôs value.
Ma‚Äôs influence outweighs his 8.9 percent shareholding and his official title. Besides being Alibaba‚Äôs public face, he heads a committee of 27 partners that collectively nominates more than half the company‚Äôs board of directors.¬†Shareholders can veto each choice, but then the partners can shoehorn in an alternative until the following year.¬†Yahoo and Japan‚Äôs Softbank, which together could own¬†over 50 percent¬†of the company‚Äôs stock after the IPO, have already agreed to back the partnership‚Äôs decisions. In practice, this means outside investors will have almost no say over how the company runs.
That might not matter, except that Ma‚Äôs¬†motivations are not quite the same as those of other shareholders. Ma personally holds some of Alibaba‚Äôs key licences through vehicles called variable interest entities (VIEs) that are necessary to get around China‚Äôs foreign-ownership rules.¬†He also controls¬†the vehicle that owns the company‚Äôs 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‚Äôs record doesn‚Äôt offer much reassurance. In 2011 he shifted Alipay out of Alibaba‚Äôs control.¬†The reason was to ensure it got a vital licence from the central bank.¬†But the transaction highlighted a pillar of Ma‚Äôs philosophy: sometimes tough, unpopular decisions must be made at a moment‚Äôs 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‚Äôs 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‚Äôs¬†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‚Äôs base in Zhejiang puts Ma in the orbit of China‚Äôs president Xi Jinping,¬†formerly the province‚Äôs party chief.¬†And one of Alibaba‚Äôs 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‚Äôs 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‚Äôs 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‚Äôs paramount leader, as he sent tanks into Tiananmen Square to crush democracy protesters in 1989.¬†And it‚Äôs not just politicians that might bristle at Ma‚Äôs ambition.¬†In the financial world, Alibaba‚Äôs push into online investment funds is a direct challenge to state banks, which make for powerful enemies.
A backlash could take many forms. Alibaba‚Äôs effective monopoly over online retail makes it a potential target for antitrust scrutiny. Alibaba‚Äôs VIEs, meanwhile, have questionable legal status in China. Shutting down the country‚Äôs 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‚Äôs 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‚Äôs environment.
Alibaba‚Äôs founder is arguably modern China‚Äôs most successful entrepreneur. But he has also made little secret of where his priorities lie: ‚Äúcustomers first, employees second and investors third.‚ÄĚ¬†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.