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The plot thickens

15 Aug 2014 By John Foley

Alibaba’s investment story has turned from romance to thriller. Its Hong Kong movie-making affiliate has uncovered “possibly non-compliant” accounting just four months after the Chinese e-commerce giant bought a 60 percent stake. It’s not clear whether Alibaba’s controls were flawed – but it certainly raises questions about the value of the company’s recent investment binge.

The stake in ChinaVision, as the company was previously known, is just one of a string of recent deals. In total, Alibaba and its affiliates have spent $7.5 billion on acquisitions and investments this year, according to figures compiled by Reuters. While the company has made light of its deal-making processes in the past – founder Jack Ma supposedly agreed to buy a stake in a soccer team after a drinking session – the ChinaVision deal was approved by the board following due diligence by an outside accounting firm, according to people familiar with the situation.

Still, it’s a blow to the idea that Ma always deserves the benefit of the doubt. Like many of Alibaba’s investments, the logic of buying a film studio was fuzzy for a company whose main business is matching buyers and sellers of goods online. Alibaba did little to explain. That didn’t stop investors from rushing to ride on the company’s coat-tails. Before the shares were halted, the renamed Alibaba Pictures had a market capitalisation of HK$34 billion ($4.4 billion), more than triple the valuation implied by Alibaba’s investment.

The financial damage won’t be clear until Alibaba Pictures reveals the size of the write-downs. Its parent will no doubt have tough questions for former chairman Dong Ping, who moved aside in June though remains a consultant and a 9 percent shareholder, and for Deloitte, the company’s long-time auditor.

The real casualty of the saga, however, is the notion that Alibaba’s investments automatically create value for its shareholders and those of its targets. Though substantial, its spending spree this year is small in the context of the group’s mammoth e-commerce business and its mooted $100 billion-plus valuation. But a glimpse of less-than-perfect judgement so close to the initial public offering is exactly the kind of plot twist Alibaba doesn’t need.


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