Alibaba deal spree turns from romance to thriller
By John Foley¬†
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Alibaba‚Äôs investment story has turned from romance to thriller. Its Hong Kong movie-making affiliate has uncovered ‚Äúpossibly non-compliant‚ÄĚ accounting just four months after the Chinese e-commerce giant bought a 60 percent stake. It‚Äôs not clear whether Alibaba‚Äôs controls were flawed ‚Äď but it certainly raises questions about the value of the company‚Äôs recent investment binge.
The stake in ChinaVision, as the company was previously known, is just one of a string of recent deals. In total, Alibaba and its affiliates have spent $7.5 billion on acquisitions and investments this year, according to figures compiled by Reuters. While the company has made light of its deal-making processes in the past ‚Äď founder Jack Ma supposedly agreed to buy a stake in a soccer team after a drinking session – the ChinaVision deal was approved by the board following due diligence by an outside accounting firm, according to people familiar with the situation.
Still, it‚Äôs a blow to the idea that Ma always deserves the benefit of the doubt. Like many of Alibaba‚Äôs investments, the logic of buying a film studio was fuzzy for a company whose main business is matching buyers and sellers of goods online. Alibaba did little to explain. That didn‚Äôt stop investors from rushing to ride on the company‚Äôs coat-tails. Before the shares were halted, the renamed Alibaba Pictures had a market capitalisation of HK$34 billion ($4.4 billion), more than triple the valuation implied by Alibaba‚Äôs investment.
The financial damage won‚Äôt be clear until Alibaba Pictures reveals the size of the write-downs. Its parent will no doubt have tough questions for former chairman Dong Ping, who moved aside in June though remains a consultant and a 9 percent shareholder, and for Deloitte, the company‚Äôs long-time auditor.
The real casualty of the saga, however, is the notion that Alibaba‚Äôs investments automatically create value for its shareholders and those of its targets. Though substantial, its spending spree this year is small in the context of the group‚Äôs mammoth e-commerce business and its mooted $100 billion-plus valuation. But a glimpse of less-than-perfect judgement so close to the initial public offering is exactly the kind of plot twist Alibaba doesn‚Äôt need.