Alibaba Stock Soars. An Unprecedented Shakeup Could Unlock Major Value

Alibaba BABA +12.33%  stock was on track for its best day in months after the Chinese technology giant announced that it would split itself into six units, opening the door for its subsidiary businesses to go public.

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Akin to Alibaba (ticker: BABA) shifting from conglomerate to holding company, the move is designed to unlock shareholder value and foster market competitiveness, said the group, which is one of China’s largest and most important companies. It’s a nod both to investors who have weathered years of losses for the stock—caused largely by regulatory pressures—as well as regulators who have hammered Alibaba and the rest of the Chinese tech sector over competition concerns since late 2020.

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Alibaba announced that it would become a holding company with six divisions: a high-growth cloud computing and intelligence group, which includes its efforts in artificial intelligence; a global digital commerce arm; a unit focused on digital media and entertainment; a local services business; the Cainiao smart logistics division; and Taobaba and Tmall, its core Chinese e-commerce operations.

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Except for Taobao and Tmall, which will remain entirely owned by Alibaba, all six units will have the ability to attract outside cash and seek initial public offerings. Daniel Zhang will remain chairman and CEO of the holding company in addition to leading the cloud business (which he became president of in December), with the other units gaining their CEO and board of directors.

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Any business group and company can seek autonomous fundraising and IPOs when they are ready, according to Zhang, who stated in a statement that the market is the greatest yardstick. At the age of 24, Alibaba is welcoming a fresh chance for growth.

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The Alibaba-owned South China Morning Post first claimed that Alibaba shares will continue to be listed in New York and Hong Kong before the mention of the company's listing was subsequently taken out of the article.

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Alibaba's American Depositary Receipts (ADRs) in the United States rose more than 11%, putting the stock on track for its highest gain since early January.

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This restructure has most certainly been in the works for some time, according to Citi analysts led by Alicia Yap in a note, citing changes in how Alibaba reports on its current business groups and Zhang's recent promotion to the top of the cloud unit. Still, the revelation is "an earlier-than-expected surprise," according to Citi analysts.

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"Although it may still take some time for each business unit to go through the separate fundraising efforts, whether the holding group will maintain the consolidated share or de-consolidated interest of the business unit following the separate listing remains uncertain," Yap added.

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Alibaba has evolved from an e-commerce startup started by Jack Ma in 1999 into a huge internet corporation with operations ranging from domestic online retail in China to an AI branch developing a competitor to ChatGPT.

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Setting up its subsidiaries for a life outside of Alibaba's direct management makes the firm the latest conglomerate to divide itself apart in recent years, following General Electric (GE), Johnson & Johnson (JNJ), and Toshiba (6502. Japan).

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"This is good for shareholders," said Thomas Hayes, chairman of Great Hill Capital, a stakeholder in Alibaba. "When faster-expanding company sectors are eventually given significantly greater multiples by the market when I'd or spun to shareholders, the sum of the parts' valuation will be achieved more quickly."

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There might also be regulatory consequences. While Alibaba's stock reached its highest level in a month on Tuesday, trading around $96 per share, the company's market worth has plunged since late 2020, when it was above $300. The organization has come under fire from Chinese officials, who have tightened down on the country's rapidly rising digital sector due to competitiveness and data security concerns.

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"Six tiny pieces will go under the radar as opposed to one monster as a persistent target," Hayes explained.

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Alibaba may have focused on unlocking wealth for shareholders, but freedom from additional regulatory restrictions might be the valuable return for breaking apart.

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