Alibaba deal spree strains its financial strength

2 min read
EMEA, Asia

Alibaba’s deal spree is testing its financial strength. The Chinese e-commerce giant spent the bulk of its operating cash flow on acquisitions and minority investments in 2014, but doesn’t provide much detail to shareholders. Though the group’s core business is robust, returns on the new ventures are less certain.

Alibaba is so big that many purchases are too small to disclose. Though its $200 million investment in Snapchat was widely reported earlier this month, Alibaba has not formally acknowledged the financing which values the much-hyped chat app at $15 billion. Its recent contribution to funds managed by Jerusalem Venture Partners, an Israeli venture capital firm, is also confidential.

Chairman Jack Ma talks of building an “ecosystem” of connected services. But the common thread is far from obvious. This year alone, Alibaba has invested $590 million in a Chinese smartphone maker, participated in a $600 million cash injection for a Chinese taxi-hailing app, set up a $160 million joint venture to develop internet-connected cars, and led a $60 million investment in a U.S. mobile search firm.

Some transactions attributed to Alibaba are actually channelled through executives’ personal vehicles or affiliated companies. Yet the listed group’s investments are a drain on cash: Alibaba spent $7.5 billion on acquisitions and minority investments in 2014 – three quarters of its operating cash flow for the year.

It’s also hard to tell how Alibaba’s new ventures are faring. The company’s share of its associates’ losses rose to $130 million in the three months to December, from less than $50 million in the previous quarter. Stakes in start-ups are often in the form options or convertible shares, which means Alibaba doesn’t have to book its share of the ventures’ losses. But minority stakes in listed affiliates have fared poorly: Alibaba’s 16.5 percent shareholding in video site Youku Tudou is worth less than half the $1.1 billion the company paid last April.

With a market capitalisation of more than $200 billion and no debt, Alibaba can afford to place big bets on new services and technologies. Some may pay off. Nevertheless, the lack of information will prompt fears that the company is squandering its financial strength. Now that some pre-IPO shareholders are free to sell, investors’ faith is likely to be tested.