Alibaba Group Holding Ltd. soared after announcing it would overhaul its operations with a reorganization that the company says is “designed to unlock shareholder value” and which could lead to future initial public offerings of the various newly created units.
The Chinese e-commerce giant announced Tuesday its plans to reorganize into six business groups and other investments. The six groups will have their own CEOs and boards of directors, while the overall company will still be led by Daniel Zhang, Alibaba’s BABA, +14.26% chairman and CEO.
Alibaba’s Hong Kong-listed shares 9988, +13.18% jumped 13.8% in early trading Wednesday, after its U.S.-listed shares BABA, +14.26% flew 14.3% higher Tuesday.
“The market is the best litmus test, and each business group and company can pursue independent fundraising and IPOs when they are ready,” Zhang said in a letter to employees, according to a post on Alizila, Alibaba’s corporate news site.
The reorganization comes amid pressure on Alibaba’s stock in recent years. Alibaba has had to contend with a slowing economy in China, a tougher regulatory climate, geopolitical tensions and a more competitive backdrop.
Alibaba’s U.S.-listed shares had declined 25% over the 12 months prior to the announcement, as the KraneShares CSI China Internet ETF KWEB, +4.32% had dropped about 1%.
Great Hill Capital Chairman Thomas Hayes called the move “the ultimate value unlock” in emailed comments to MarketWatch.
“This will enable ‘sum of the parts’ valuation to be realized more quickly—as faster growing business segments will ultimately be awarded much higher multiples by the market when IPO’d or spun to shareholders,” he wrote.
The post noted that while the units will be able to raise outside capital, the Taobao Tmall Commerce Group is the lone exception as it “will remain an Alibaba Group wholly owned unit.”
Alibaba’s six business groups will be its Cloud Intelligence Group, its Taobao Tmall Commerce Group, its Local Services Group, its Cainiao Smart Logistics group, its Global Digital Commerce Group, and its Digital Media and Entertainment Group.
The Cloud Intelligence unit will count Zhang as its CEO, which the Alizila post said was previously announced.
As Alibaba has grown in stature since its founding, it’s expanded beyond core e-commerce into areas like cloud computing and logistics, not unlike the way big U.S. tech players like Amazon.com Inc. AMZN, -0.82% and Alphabet Inc. GOOG, -1.65% GOOGL, -1.40% have.
Hayes noted that the AWS cloud-computing business sits inside of Amazon, and he asks what that unit would be worth if the e-commerce giant were to spin it out. “Alicloud will now have that same opportunity,” he wrote.
“Alibaba’s Cloud, Logistics, and International Commerce units may be worth more as individual entities rather than components of Alibaba Group,” Baird analyst Colin Sebastian chimed in in a note to clients.
Alibaba’s post also stated that through the reorganization, the company “will slim down middle and back office functions at the group level while only functions required for listed company compliance will be retained.”
Hayes saw potential regulatory advantages for Alibaba as well as it embarks on its new structure. The move “takes any residual regulatory overhang off the table as six smaller pieces will fly under the radar versus one behemoth as a constant target,” in his view.