JD.com (HK: 9618) (NASDAQ: JD) stock jumped post-market in the US on the announcement of corporate spin-offs. The Hong Kong stock rose 7% early this morning in sympathy. The proposal is similar to that of Alibaba recently, to improve shareholder value by, to some extent, deconstructing the company itself. Given the share price move on the announcement of the plan investors seem to think it a good idea too.
The specifics for JD.com are that two subsidiaries of JD.com will float independently on the Hong Kong exchange. Jingdong Property covers the real estate interests of the group, Jingdong Industrials the services to the light industrial sector. Each have now filed their plans for an IPO in Hong Kong. This is more than just a plan being talked about therefore. After completion JD.com will still own over 50% of each company.
JD.com share price from Hong Kong Stock ExchangeNote that the JD.com share price rose at the open, that significant level above the previous close.
As to why this is being done we have two different sets of possible explanations. Either work and arguably both are true. We can start from the idea that management's duty is to increase shareholder value. As the split and IPOs are obviously - see the share price above - increasing shareholder value then management should be doing this. But that then really leads to the question of why does it increase the market capitalisation at JD.com? As the broadly similar actions at Alibaba did?
One answer is that such things run in fashions, cycles. At some points in time conglomerates are that fashion, one corporate structure containing many businesses. At other times independent companies each pursuing their own interests are regarded as more efficient - and therefore valuable. But that is also just pushing the question back one iteration - what drives the fashions?
To economists - who given that they are not always rich are not always the very best commentators on stock markets - the decision point is the cost of raising capital. In underdeveloped capital markets then the internal allocation of capital within a company is the efficient way of launching new business lines, of deploying shareholder capital from past successes. In a developed and efficient market - one where both paying out capital and also raising it anew from the market is cheap - then the greater efficiency of each company pursuing their own single interest is market value enhancing.
So, the theory says that as capital markets become more developed and liquid then we should see conglomerates demerge into companies each with their own specific business line and sector specialty. We can even say that if we see these demergers then this is evidence of that greater capital market efficiency. Which we should probably take as being true of these Chinese giants, JD.com and Alibaba. We might also go on to predict that other such companies will start doing the same.