alibaba business reorganization

Alibaba (NYSE: BABA) has announced a major reorganization of the business and would split it into six units. The move comes shortly after the company’s co-founder Jack Ma appeared in China after a gap of around one year.

This is the most significant reorganization for the Chinese tech giant in its history which it says is “designed to unlock shareholder value and foster market competitiveness.”

Alibaba stock underperformed badly for the last three years and last year it fell below its 2014 IPO price amid the sell-off in Chinese stocks. While the stock has rebounded from last year’s lows, it is still way below its all-time highs.

The six units (mentioned below) would have the ability to raise capital and also explore IPOs. Incidentally, earlier this year, China unveiled overseas IPO rules for domestic companies.

Alibaba already has listings in both the Shanghai and Hong Kong exchange to complement its US listing.

Here are the Six Divisions that Alibaba Would Split Into

  • Taobao Tmall Commerce Group which would house Alibaba’s online shopping platform including Tmall and Taobao. It would be the only business that would still remain fully owned by Alibaba.
  • Global Digital Commerce Group which would look after the company’s international e-commerce operations including AliExpress.
  • Cainiao Smart Logistics which would have Alibaba’s current logistics business.
  • Local Services Group that would house the company’s food delivery and mapping businesses.
  • Digital Media and Entertainment Group which would be home to the company’s streaming operations.
  • Cloud Intelligence Group which would include the company’s cloud and AI business. The business would be led by Daniel Zhang who would also continue as the CEO of Alibaba.

Alibaba to Have a Separate Business for AI

Notably, the business segment looking after AI and cloud would be led by Zhang which corroborates the importance of the segment for the company.

An apparent AI war is going on between the US and China and Baidu recently unveiled its Ernie chatbot as an answer to OpenAI’s ChatGPT and Google’s Bard.

That said, both Bard and Ernie disappointed on the debut and Alphabet stock lost $100 billion in market cap after it unveiled Bard.

AI is emerging as the new battleground not only between the US and China but also between Big Tech companies.

Meanwhile, Alibaba is quite optimistic about the business reorganization and markets seem to share similar views-as is visible in the steep rise in BABA stock today.

In his remarks, Zhang said, “This transformation will empower all our businesses to become more agile, enhance decision-making, and enable faster responses to market changes.”

To be sure, Alibaba moving to a holding company structure is not something that is unheard of the in the tech industry. Fellow Chinese tech companies like Tencent and Bytedance have similar structures.

In the US, Alphabet also became a holding company way back in 2015.

Alibaba Stock Has Underperformed Badly Since 2020

While the tech rout began in 2022 and the tech-heavy Nasdaq Composite lost a third of its value last year, Alibaba’s underperformance stretches to 2020 and the company has lost around $600 billion in market cap since then.

That year, the company had planned the IPO of its fintech company Ant Financial which was scuttled by China at the last moment after Ma criticized the country’s regulators.

Ant Financial was set to become the largest IPO ever and beat the record of Alibaba. However, China had different plans and blocked the IPO. Ma was also not seen in public for months after that before reappearing in online interaction in early 2021.

He has since been seen pubic sporadically. Months after Ma’s comments, China imposed a fine of $2.8 billion on Alibaba which was the highest ever for a Chinese company.

China is Amending Relations with the Tech Sector

However, amid an economy that is slowing down structurally, and the growing tech/trade war with the US, China has signaled a thaw in relations with tech companies.

With the new business structure, Alibaba hopes to add stockholder value-something it has failed to do for three consecutive weeks.

The initial market reaction to BABA’s new business structure shows that markets appreciate the move. The business reorganization coupled with the Chinese government’s apparent intent of rapprochement with the tech sector might mean better days ahead for the investors.

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