Alibaba’s (BABA) biggest overhaul in over two decades might prove contagious. China’s e-commerce group is splitting into six units, some of which may then be listed or sold. That should unlock value for weary shareholders, and please regulators and politicians keen to control strategic businesses. Other tech giants like Tencent may follow.

The restructuring will give each of Alibaba’s six businesses, which include its core commerce division, as well as cloud computing, games, and logistics units, their own chief executive and board of directors. More importantly, each division will have the option to “pursue independent fundraising and IPOs”, according to boss Daniel Zhang, who will continue to sit atop the Alibaba Group holding company. Investors promptly added nearly $23 billion, or 10%, to the New York-listed company’s market value, now at $250 billion, following Tuesday’s announcement.

Years of regulatory crackdowns and Covid lockdowns have weighed on Alibaba’s shares, which now trade at a historical low of less than 10 times forward earnings, per Refinitiv forecasts, half their five-year average and below rivals JD.com, PDD, and Tencent. A breakup could quickly unlock value: analysts at Citi reckon Alibaba’s two most valuable businesses – domestic e-commerce and cloud computing – are worth $222 billion combined, implying investors are ascribing little value to the rest. Loss-making divisions like online videos could be sold to a rival, while more promising bets like the logistics arm could be listed or raise money from private backers.

The shakeup should also please Beijing. Party officials are strengthening their political influence over private firms, particularly those in sensitive industries. State-owned vehicles have already taken so-called golden shares – a 1% stake that typically comes with board representation and/or veto rights for key business decisions – in two of Alibaba’s onshore units. But regulators may be happy to see Alibaba’s more sensitive operations, like the Cloud Intelligence unit that specializes in data analytics and artificial intelligence, separated from the rest, and potentially even relisted on the mainland.

Tencent should take note. The $460 billion video game giant also operates in sensitive areas like online media, cloud computing and mobile payments. If Alibaba’s approach ends up pleasing both shareholders and regulators, then it will prove hard to resist.

Context News

Alibaba on March 28 said it plans to split its business into six independently run entities, enabling most of them to pursue fundraisings or listings. Alibaba’s U.S.-listed shares rose as much as 10% after the news in pre-market trading. The Chinese conglomerate said that the biggest restructuring in its 24-year history would see it split into six units, including core retail division Taobao Tmall Commerce and Cloud Intelligence, which offers IT services. The other four units will be delivery arm Local Services; Cainiao Smart Logistics, which offers virtual mapping; as well as Alibaba’s global retail and entertainment divisions. Daniel Zhang will continue to serve as chairman and chief executive of Alibaba, which will follow a holding company management model, and concurrently serve as CEO of Cloud Intelligence. Each of the six business groups will be managed by its own CEO and board of directors and will retain the flexibility to raise outside capital and seek an initial public offering, Alibaba said. The exception would be Taobao Tmall Commerce, which will remain wholly owned by Alibaba.

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