Alibaba (HK: 9988) (NYSE: BABA) has found a way to please Wall Street and investors in Hong Kong. Split up the company - although that's not quite and wholly what is being suggested. Instead, the different divisions of the company are to be given much more freedom to go their own way - up to and including being able to have IPOs of their own stock in the fullness of time. This isn't the same as a demerger, they're not breaking up the band here. It's more like everyone gets to do their own side projects - the importance of which is that everyone can then be judged on the success of those side projects.
The economic background here is really a management, a measurement, problem. Yes, of course scale matters, even more so online than elsewhere. Network effects do mean that many markets will end up with the one dominant supplier as that's the most economically efficient structure of the market. Alibaba has of course won in a number of those. It's also true that success in one market can be leveraged into success in another - the growth of Ant Financial shows that. But then comes a problem.
Alibaba ADR share price from NASDAQ
That problem being, well, how do we keep the different divisions of a vast conglomerate on the straight and narrow? Continuing to each add value now that they're mere parts of a vast whole? There was, decades back, a fashion for such conglomerates. The profits from one business could be ploughed into another division to grow over the years. But that depended for its validity on the costs of raising outside capital. It was indeed expensive for capital, money, to cross the corporate boundaries in either direction. Either in taxation of dividends and so on, or in the stock market costs of raising new capital.
Conglomerates rather went out of fashion as their inefficiencies became obvious - but also as taxation and capital market costs fell. Now piercing the corporate veil is cheap. So, instead of the management of the conglomerate allocating capital to new business lines return it to shareholders and they can reallocate as they see fit. We gain market strictures, market measures of success, on each individual business unit.
The Alibaba plan is an interesting hybrid. Scale really does matter online, so remain as a somewhat centralised organisation. But also gain access to those market measures of success by allowing each division to be partially quoted as well. That's the actual plan here and there's a certain elegance to it. Thus the stock price rise at BABA. How do you maintain growth in a vast company? Make it a series of smaller companies.
