E-commerce and cloud computing giant Alibaba (BABA 2.55%) has a fascinating corporate history. The company was founded by eccentric Chinese entrepreneur Jack Ma. Additionally, some of the company's earliest investors include Yahoo and SoftBank. Alibaba did not really become a mainstream name until its initial public offering (IPO) in 2014, when it raised nearly $22 billion and was then the largest IPO in history.
In a shocking move, Alibaba recently announced that it would be going through an organizational restructuring. Let's dig into what this means and if the stock is worth a look for your portfolio.
Splitting six different ways
Over the last decade, Alibaba has expanded its products and services well beyond its core e-commerce business. However, for the last few years, the company has struggled to generate robust growth, and the stock price shows it. In fact, since its IPO, the stock is down 5%.
This means that all of the shareholder value that was created in its early days has been wiped out. While this magnitude of a sell-off may be overblown, the fact remains that Alibaba is struggling.
Now, to be fair, Alibaba is a Chinese company. Therefore, it undoubtedly felt the effects of lockdowns from the COVID-19 pandemic. However, as pandemic fears wane, the company has continued to struggle, and Alibaba's management team has found itself at a pivotal crossroads.
At the end of March, Alibaba announced that it would be splitting itself into six separate entities. Per CNBC's coverage of the story, there will be a new segment for each of Alibaba's core divisions. These include cloud computing, Taobao Tmall (e-commerce), local services, Cainiao logistics, digital commerce, and digital media. Moreover, each division will have its own CEO and Board of Directors.
Image source: Getty Images.
What is the investment opportunity?
There has been a lot of speculation as to why Alibaba made this decision. In other words, it may not all come down to slowing growth for the company. There is a legitimate case to be made that Alibaba is effectively a monopoly. Given its size, it's no surprise that Alibaba is often under the magnifying glass of the Chinese government.
Following the news, research analyst Scott Kessler alluded that perhaps the Chinese government endorsed this move. The long-term thesis for this reorganization is that each division can essentially operate as its own company.
Taking this a step further, it could imply that each of the six new CEOs will have a distinct vision, allowing the respective entities to make decisions more quickly and, more importantly, compete with other internet and cloud companies more directly.
In essence, the different segments will have the ability to create specific budgets, identify key initiatives, and raise capital from their own specific syndicates. The ultimate goal could be to potentially spin off from Alibaba and list on a public exchange on their own.
Are spinoffs safe?
The prospect of Alibaba spinning off and listing six different companies is intriguing. Unlike an IPO, investing in a spinoff allows investors to be the first buyers in a new growth story. Remember, when a company goes public, the founders and early investors have the ability to ring the cash register. So while it seems like you are getting in early, it's important to remember that someone else got in earlier, and you're buying their shares.
Jim Osman of The Edge Group, a consultancy, echoed this point during a recent interview with CNBC. Osman made it clear that he would advise investors to exchange their shares in the Alibaba parent should the opportunity arise in the case of a spinoff.
He also made an interesting point about IPOs vs. spinoffs, referenced two recent spinoffs from United Technologies: Otis Worldwide and Carrier. Since the respective divestitures and public listings in 2020, Carrier has returned over 250% to investors, while Otis has returned over 80%.
These returns are not entirely surprising. While Carrier and Otis have been around for decades, each company was owned by a larger conglomerate. However, as separate entities, each firm now has a unique ability to redefine itself and operate as a growth company.
Investors will need to be patient to see if Alibaba is executing this plan successfully. A prudent action for existing investors would be to hold tight and assess future earnings. This will allow you to determine if your shares may be worth exchanging in some of the different entities if the time comes.
By contrast, investors looking at Alibaba stock may want to sit on the sidelines for a bit. This way, by researching future earnings, you will learn about each division and identify which ones pique your interest. Eventually, it may make sense to buy shares in Alibaba before any potential spinoffs and separate listings if one or more of the spinoff entities makes it on your investment radar.
