Corporate Activities:Alibaba Group
About the paper
Corporate finance activities are now deeply embedded into the core business environment of any business entity. Be it for the quest for growth, additional capital or corporate governance, all such crucial decisions are related to the environment of corporate finance. To learn more about such business aspects, in this paper, we will discuss two corporate finance activities undertook by Alibabe Inc. These two activities are related to mergers and acquisitions and alteration to the capital structure of the company.
Mergers and Acquisitions: Alibaba to Invest $1 Billion in E-Commerce Startup Lazada
On 13th April, 2016, Chinese Internet giant Alibaba Group Holding Ltd. announced its biggest every overseas acquisition with payment of $1 billion for a controlling stake in Singapore based e-commerce giant, Lazada Group. The acquisition will be made through $500 million investment in newly issued Lazda shares and through purchase of shares worth $500 million fro existing shareholders such as Rocket Internet, ABKinnevik and Tesco Group.
The move was highly anticipated y Alibaba Group, who had been betting aggressively to spread its presence in Southeast Asia. Market reacted positively to the news with market analysts appreciating the company’s frontrunner vision to gain the benefit from the untapped opportunities in Southeast Asia, while the company’s domicile area, Republic of China still facing the economic downturn. The deal was completed using the $3.7 billion free cash flow available with it to expand into e-commerce and logistics market.
The company’s management cited the globalization strategy as the core focus of Alibaba to tap present as well as future growth and the ability to tap into Lazada’s logistics, as the primary reason to go ahead with the acquisition deal.
In my opinion, the acquisition seems to be perfect a reply of Chinese companies, who have turned cautious on account of the depressing trend in consumer spending and overall economic variables in China, and to look for opportunities outside China to re-infuse growth into their organizational architecture. As for Alibaba, the move here seems to be a calculated and well-though business decisions as this was not the first ever acquisition of the company outside China. In fact, during 2014, the company, along with Foxconn Technology Group and SoftBank Group Co. invested $500 million in Indian e-commerce venture, Snapdeal.com. Later that year, the company also acquired a minority stake in Singapore’s main postal service for $249 million to expand its e-commerce logistic business.
Now, with the acquisition of Lazada Group, the company clearly seems to be benefiting from the vertical integration associated with logistic business it created with acquisition of postal service in Singapore.
The whole positive aura created in the market for the deal seems clearly justified citing the astounding success of Lazada and how it has an extreme potential to add value for Alibaba Group, both in short-term and long-term. Important to note, founded in the year 2011, Lazada has expanded aggressively in Southeast Asia and by the end of April, 2016, was home to 600 million customers. The company had witnessed the astounding growth on account of increasing internet penetration in markets like Singapore, Phillipines and Thailand, and also because of large product portfolio it offers to its customers. On the other hand, Lazada Group has been suffering from weak infrastructure and poor logistic abilities, and with Alibaba Group already holding a robust infrastructure, efficient information technology and logistic network, the acquisition will help the company to attain additional growth and allow it to enter new markets. Additionally, for any overseas expansion, costs of building the brand and logistic expansion is the foremost factor, however, for Alibaba, there is no such issue as the company already enjoy strong brand equity around the globe and has sufficiently invested in logistics network already. Accordingly, the company will be able to reap significant synergies from the Lazada deal on its ability to provide strong infrastructure and logistics guidance, which will help Alibaba to bring costs down and shorten lead delivery time.
Henceforth, it is very much validated that this deal will add benefits for Alibaba and allow it to add more merchants to its platform, while using the existing brand name of Lazada to grow further.
Event#2: Alibaba Group in talks with bank for additional $4 billion debt financing
A market report released on 26th February, 2016, cited Alibaba Group’s discussion with the banks to borrow an additional $4 billion to its capital structure. The report cited that the company is expecting to use these funds for expansion plans in the form of multiple acquisitions that the company is planning this year, both in China and overseas market, especially, South East Asia. Even the management of the company confirmed that while initially they were proposing $3billion loan, the company has now increased the requirement request to $4 billion. Even the market asserted positive indication on the company’s decision to add more debt to its capital structure on the grounds of smart acquisitions in the recent past. On the day of the announcement, the company’s stock closed 2% higher on NASDAQ.
The alteration of the capital structure composition here by the company is fully justified as the company is now looking aggressively to fund its investment, which has increased from just being a trade partner to wide range including mobile app partner and logistic partner also. For instance, in June, 2015, the company invested $1 billion in food-ordering app, Koubei, in order to increase its service portfolio that connects online users with brick-and-mortar businesses like restaurants. Thereafter, the company announced to acquire 20% stake in Chinese Electronic retailer, Suning Commerce Group Ltd with the intend to to enhance its logistic business while teaming up with a bricks-and-mortar retail chain.
On the other hand, considering the alteration to the capital structure from a financial point of view, as per annual report of the company ending 31st March, 2015, the company was having total debt capital amounting to $8093 million, while the equity capital was recorded at $22381 million, thus making the debt-equity ratio at 0.36, which is significantly lower than the industry average of 0.70. Therefore, the company’s step to add more debt to its capital structure can be attributed as a step to move its capital structure towards an optimal level and thus, reduce the overall cost of capital and increasing the value of the company.
In my opinion, the company should follow the static trade-off theory of creating a mix of debt and equity that is optimal according to the overall business environment of the company. Moreover, in addition to additional borrowing, the company can also consider share repurchase activity as even without the debt amount, the company was having $5.15 billion in free cash flow. This corporate decision will give dual benefit to the company:
Share repurchase activity is a direct indication by an entity for its shareholders that the company is highly confident in its future operations and prospects. Therefore, following a prudent share repurchase, the company will witness an overall optimism and probably a high share price. Moreover, any additional equity issue in the future will be available at lower cost.
Adding a rational amount of debt to the capital structure reduce the principal-agent problem as with a rational debt in the capital structure, shareholders always perceives that the company will not enter into any risk venture that could impose a threat to their capital. Moreover, keeping a rational amount of debt in the capital structure is also a sign of good corporate governance. Finally, higher level of debt level in the capital structure will also offer the advantage of tax shield for the company and will enhance its profitability.
References
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OSAWA, JURO. Alibaba in Talks With Banks for up to $4 Billion Loan. 26 February 2016. 8 May 2016 <http://www.wsj.com/articles/alibaba-in-talks-with-banks-for-up-to-4-billion-loan-1456488618>.
Wang, Zao. "The Pecking Order Hypothesis or Static Trade-Off." 2013.
