Following up on my initial entry on foreign takeovers and ownership of China-based companies, today’s focus is on the Chinese internet industry in general and the Alibaba Group in particular. Alibaba was founded in 1999 by a group of business people including Ma Yun, also known by his western name of Jack Ma. The story of Alibaba’s development involves western investment, ownership and controversial transfer of assets. It shows how sensitivity to foreign ownership can be a universal phenomenon.
It is notoriously hard for western firms to get involved in China’s internet sector. While it is clearly a dynamic industry, with private ownership of major firms like search engine Baidu and social networking site Renren, it appears closed to foreign involvement. However, this doesn’t prevent these and many other Chinese technology firms from seeking capital and status abroad through Initial Public Offerings (IPOs).
Alibaba, therefore, is fairly unique in having a majority of its shares owned by foreign interests: Yahoo, the US-based internet company and Softbank a Japanese telecoms and media firm. Softbank was an early investor in the Chinese company, while Yahoo came to own its stake in Alibaba in 2005 when it bought a 40% stake for $1bn plus Yahoo’s China assets. Together, the two foreign firms own three-quarters of Alibaba. They also have two seats on the company’s board of directors alongside Mr Ma and the firm’s Chief Financial Officer, Joe Tsai. But controversial decisions about one of Alibaba’s divisions have revealed deep tensions about ownership and control of the company.
The conflict is to do with the transfer of Alipay, the firm’s online payments system, from Alibaba to an outside company owned by Mr Ma. The two foreign owners argued that they had not been informed or given their approval for the transfer of the PayPal-like subsidiary. Mr Ma and Mr Tsai disagreed, arguing that the board had discussed the transfer many times, adding that the sale of Alipay was necessary to comply with new Chinese rules over local ownership.
This is a significant spat, as it indicates the barriers in the way of foreign ownership of some Chinese business interests. It also shows why some overseas firms are cautious over taking controlling stakes in Chinese companies. Some argue that control is never complete when the state can introduce new ownership rules at a whim. It now seems likely that Yahoo and Softbank are in line to receive large payouts from Alibaba Group in recompense for the transfer of Alipay. On the face of it China’s authorities and business leaders appear unwilling to allow foreign ownership of key businesses. But as I shall outline in the next part of this series, sensitivity in this area is not confined to China.