☀️☕️ Breaking up with Jack Ma (Alibaba)

📊 Also: Big companies break up all the time!; 🎓 Conglomerates (and why they can be a good thing)

Happy Wednesday! 🐪

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📝 Focus

• Breaking up with Jack Ma (Alibaba)

📊 In the Markets

• Big companies break up all the time!

📖 MoneyFitt Explains

🎓️  Conglomerates (and why they can be a good thing)

📝 Focus

Breaking up with Jack Ma (Alibaba)

Alibaba, the giant China-based e-commerce and tech conglomerate🎓, is planning a radical reorganisation to split the company into six business units, led by separate CEOs and boards, each of which can be listed separately. This turns Alibaba into a holding company with only its core China e-commerce business held 100%. The deal came a day after founder Jack Ma was spotted back in China after a year abroad, sparking much speculation... but not about this! Announced after the HK market close (9988 HK closed down 1%), $BABA, the NYSE-listed ADR (American Depository Receipt), soared 14.3% as investors digested the implications, with the apparent conclusion that this move "unlocks shareholder value." For shareholders, this means that the total market value of all the individual companies combined after splitting up would be greater than if they'd remained in one single entity.

“The market is the best litmus test, and each business group and company can pursue independent fundraising and IPOs when they are ready.”

  Daniel Zhang, CEO of Alibaba

.....► All six business groups had already been operating separately under separate bosses for several years, so this move should be seen a precursor for fundraising via IPOs, though there were no details on timing. The individual companies are 1) Cloud Intelligence - cloud and AI, 2) Taobao Tmall Commerce - online shopping platforms, 3) Local Services: food delivery Ele.me and mapping, 4) Cainiao Smart Logistics, 5) Global Digital Commerce - international e-commerce businesses including AliExpress and Lazada, 6) Digital Media and Entertainment - streaming and movies.

.....► The break-up will set Alibaba on a similar path to its fellow tech giant Tencent, the gaming, social media and payments company and 20% owner of JD.com, Alibaba's main e-commerce rival. Both Tencent and JD.com have retained large or controlling stakes in a diverse set of businesses, many of which have gone on to list in HK or the US. These include Tencent's DouYu and Huya (both live-streaming gaming) and Tencent Music (all on the NYSE or NASDAQ), and JD.com's JD Logistics and JD Health (both on the HKSE.) Tencent's ride-hailing company Didi Chuxing and JD.com's cloud and AI fintech JD Technology (JD Digits), like Alibaba-related Ant Financial, failed to complete their IPOs during the central government crackdown on the power and influence of Big Tech. (Part of that crackdown was due to legitimate concern in Beijing about the scale and scope of influence of online platforms like Alibaba, and this breakup actually does address some of those concerns.)

It is all about value creation and nothing to do with politics, right, Mr. Ma? - Image credit: Tenor

.....► Many interpretations of the timing, ranging from the Chinese economy's need for private enterprises (including Big Tech, which had seen a clampdown after a critical speech by Ma over two years ago) to Ma's desire to reinvigorate growth and claw back some value after Alibaba lost $600bn of value since October 2020, to "coinciding" with a three-day business forum of American business leaders including the heads of Apple, Pfizer and Qualcomm (“China’s Davos” with new business-friendly premier Li Qiang.)

(See the feature section below for examples of how and why big companies break up all the time!)

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📊 In the Markets

Overall, markets were a bit softer on Tuesday trading, led down by tech given bond yields climbing again with the 2-year Treasury note back above 4% (makes future earnings less valuable) and less panic about the banking sector (tech was a hiding place for investors). Early in the day, a survey showed US consumer confidence unexpectedly increasing despite higher anxiety over the labour market. Alibaba jumped 14.3% on news it would split its business into six main units (see Focus above.)

Electric vehicle maker Lucid Group said it would lay off close to 1/5 of its workforce, or around 1,300 employees, to cut costs as part of a restructuring plan in the face of a major drop in orders. Yogawear maker Lululemon Athletica surged 13% in after-hours trading on a rosier earnings outlook than forecast by Wall Street's Finest after beating expectations due, in part, to “strategic market expansion”. And, reflecting good news for the rest of us, pharmacy chain Walgreens Boots Alliance's profits fell 20% on fewer sales of covid-related kits.

“Flexible payment options... designed with our users’ financial health in mind”

  Jennifer Bailey, Apple’s vice president of Apple Pay and Apple Wallet

Finally, maybe a bit sadly, ​​Apple launched the buy now, pay later (BNPL) function in its Wallet app to "select" US customers/victims, having first unveiled plans for Apple Pay Later back in June. It uses the Mastercard Installments program with repayments managed through the Wallet app, but importantly, the financing itself is provided by a fully-owned Apple subsidiary and not a third party financial institution, unlike Apple Card (a huge money loser for Goldman Sachs.)

Big companies break up all the time

At the end of the day, pretty much the sole reason to consider breaking up a publicly-listed conglomerate🎓 into businesses that have different growth prospects or risk profiles (i.e. besides anti-trust or family succession reasons) would be to "create shareholder value." But how would drive that? Among the answers would be to change the return on equity, motivation for employees and executives, cost of capital, cost of debt, acquisition currency, organisational structure, management focus, dividend payout, share repurchases, reinvestment in the companies, capital raising, breadth of the investor base or any combination of the above.

.....► Philip Morris - a tobacco giant, spun off Kraft Foods in 2007 to focus on its core business, which helped it remain profitable in the face of declining tobacco sales. Philip Morris renamed itself Altria. A subsequent split of Philip Morris International (PMI) from Altria in 2008 gave each company different geographic regions to focus on, with PMI managing business outside the United States, though it was partially to ringfence legal and regulatory issues. In 2012, Kraft Foods split into Kraft Foods (now Kraft Heinz) and Mondelēz with different product categories (Heinz, Kraft, Oscar Mayer and Philadelphia Cheese vs Cadbury, Oreo and Toblerone.)

.....► Siemens AG - In 2019, Siemens AG spun off its gas and power business into a new publicly traded company called Siemens Energy to allow Siemens to focus on its core businesses of industrial automation, digitalization, and smart infrastructure.

.....► Standard Oil - John D. Rockefeller's Standard Oil Company was broken up into 34 smaller companies in 1911 due to anti-trust laws. The new companies included Exxon, Mobil, Chevron and Amoco, which are still among the largest players in the oil industry today and extremely profitable. Several subsequently re-merged (notably ExxonMobil.)

.....► HP - In 2015, Hewlett-Packard split into HP Inc. focused on personal computers and printers, and Hewlett-Packard Enterprise focused on servers, storage, and other business technology solutions. However, both companies have struggled to maintain growth and profitability, with HP Inc. reporting declining revenues in recent years and HPE struggling to keep up with cloud computing rivals.

.....► AT&T - In 1982, the US Department of Justice ordered the breakup of AT&T, which had a monopoly on the local and long-distance telephone industry. The company was split into seven regional Bell operating companies, though many have since re-merged and reorganised to form the current AT&T, as well as Verizon and CenturyLink. The breakup led to increased competition and innovation in the telecommunications industry, which could have led to more value for shareholders.

.....► ConocoPhillips - In 2012, ConocoPhillips spun off its refining and marketing business into a separate company called Phillips 66, with the goal of improving financial performance and allowing each company to focus on its respective strengths. In subsequent years, Phillips 66 struggled to maintain profitability in the face of declining oil prices and competition in the refining industry (but in a cyclical industry, value creation or destruction is as much about giving shareholders the ability to invest in the exposure they want.)

.....► BHP Billiton - In 2015, BHP Billiton spun off several non-core assets into a new company called South32, with the goal of improving shareholder value and reducing debt. After the spinoff, South32 struggled to maintain profitability in the face of declining commodity prices and a challenging economic environment (but in a cyclical industry, value creation or destruction is as much about giving shareholders the ability to invest in the exposure they want.)

.....► Marriott - In 1993, Marriott spun off its non-hotel management businesses as Host Marriott to focus on its core lodging business. This meant Marriott could streamline its operations, reduce costs, and make strategic investments in areas such as technology and international expansion. It eventually merged with Starwood in 2016, creating one of the largest hotel companies in the world. Now called Host Hotels and Resorts, Host was able to focus on its core real estate business and is now the largest lodging real estate investment trust (REIT) and one of the largest owners of luxury and "upper-upscale" hotels in the world. Classic MBA case study!

📖 MoneyFitt Explains

🎓️ Conglomerates

• A conglomerate is a type of corporate structure where a single company owns and operates multiple diverse businesses that may be either related or totally unrelated, often organised as independent subsidiaries or divisions with their own management teams and financials. Some potential advantages:

• Diversification: By owning and operating multiple businesses in different industries, a conglomerate can spread its risk and minimise the impact of economic downturns or other industry-specific challenges.

• Synergy: In some cases, a conglomerate structure can create opportunities for synergies between businesses, such as sharing resources, expertise or bargaining power with suppliers (including banks and executives) or customers (e.g. bundling) across different divisions.

• Flexibility: A conglomerate structure can provide flexibility to adjust the size or focus of individual businesses as market conditions change, without requiring a complete overhaul of each company.

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