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Opening Sesame

30 April 2013 By Peter Thal Larsen

Alibaba has spotted hidden treasure in Sina Weibo’s social network. The e-commerce giant is paying a punchy price for roughly 18 percent of China’s microblogging phenomenon, a business that has not yet celebrated its fourth birthday and is still working out how to generate revenue.

Alibaba has taken a positively contrarian view of Weibo’s worth. The $586 million investment implies a valuation of $3.26 billion – close to the entire pre-announcement market value of Sina Corp, Weibo’s parent company. The implication is that Sina shareholders are putting no value on the company’s existing web portal business and $700 million in cash and short-term investments. If Alibaba is right, the 9 percent jump in Sina shares on the news is far too stingy.

Weibo’s new valuation looks demanding, however. Like their counterparts at Twitter and other Western equivalents, the company’s management is struggling to convert enormous clout on the web into cash in the bank. Weibo started experimenting with ads last year. In 2012, they provided just 12 percent of Sina’s advertising revenue – about $50 million.

The investment has potential benefits. It could help point Weibo’s 46 million daily users towards Alibaba’s online stores, or give retailers seamless access to Weibo’s platform. The two reckon such vague synergies will generate more than $120 million in additional annual revenue for Weibo over the next three years.

But Alibaba may be thinking less about gains than about potential losses. Roughly four out of every five yuan currently spent on e-commerce in China travel across its platforms. Alibaba wants to defend this from potential rivals such as Tencent, which has captivated users with its WeChat free mobile messaging service. WeChat doesn’t currently enable e-commerce, or make any money, but such innovations cannot be ruled out. With a high-profile initial public offering in the works, Alibaba could use Weibo to give its own mobile strategy a boost.

Even so, more than half a billion dollars in cash – more if Alibaba exercises an option to raise its Weibo stake to 30 percent – remains a big bet. Alibaba must hope that its prospective investors share its enthusiasm.

 

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