What happened
Shares of Chinese tech giant Alibaba (BABA 1.25%) popped on Tuesday after the company announced it is splitting into six -- yes, six -- separate companies. As of 10:10 a.m. ET, Alibaba stock was up 8%.
So what
In its most recent quarter, Alibaba generated revenue of nearly $36 billion -- it's a massive company that does business in e-commerce, cloud infrastructure, media, financial technology, and more. However, the company's revenue of $36 billion was up only 2% from the prior-year period. And management apparently believes that splitting into six separate companies will help increase focus for each, allowing them all to perform better over time.
Alibaba's press release said that each new entity will be able to raise capital at its individual discretion, possibly including its own initial public offering (IPO). And regarding IPOs, the timing of Alibaba's announcement doesn't seem random to me. Just last month, China's government updated its policies for companies publicly listing overseas, and these rules go into effect on March 31, as reported by CNBC.
Now what
What this will mean for Alibaba shareholders is a little unclear. Alibaba will remain the holding company for the six new entities. And one unit, Taobao Tmall Commerce Group, will still be wholly owned by Alibaba. But the ownership structure could change for the other five as they seek investor funds. Moreover, Alibaba shareholders will have to wait until IPO plans are drawn up to know how many IPO shares they could expect from these Alibaba businesses.
Alibaba's management says it's doing this to "unlock shareholder value," and it's possible that could happen. However, in my opinion, investors should temper expectations for now until they get more details.
