Alibaba Merger Machine Stumbles as Movie Arm’s Books Questioned
Alibaba Group Holding Ltd. (BABA), after announcing an average two acquisitions a month this year, is learning the importance of doing your homework.
The risks of a deal spree that expanded Alibaba’s reach into areas ranging from pharmaceutical data to department stores were highlighted today, when a film producer it bought control of in June said it uncovered possible accounting flaws and won’t be able to publish its interim results on time.
It was awkward timing for a company that’s about to parlay its success in China’s e-commerce market into what could be the biggest ever U.S. initial share sale. As Alibaba becomes a public company, founder Jack Ma may have to slow down dealmaking that reached $4.6 billion this year to ensure investors don’t get burned by soured acquisitions.
“People will take a look at their future M&A more carefully,” said Raymond So, dean of the business school at Hang Seng Management College in Hong Kong. “In the past Alibaba was such a big name, but given this event, people in the future will have second thoughts about whether it’s a good deal or not.”
A new management team installed by Alibaba Group at unit Alibaba Pictures Group Ltd. (1060) uncovered possible “non-compliant treatment” of financial information for periods before its acquisition, which was announced in March and completed in June. In addition, Alibaba Pictures, formerly known as ChinaVision Media Group Ltd., may not have made enough writedowns for some assets in the first half of the year, the filing shows.
Alibaba agreed to buy 60 percent of the company in March for HK$6.24 billion ($805 million) to gain rights to television dramas and English Premier League soccer. It was one of 15 deals announced by Alibaba this year, making it the most acquisitive Chinese company by that measure in a tie with Tencent Holdings Ltd., data compiled by Bloomberg show.
Ma, 49, has been locked in a deals race with Tencent Chief Executive Officer Ma Huateng as the two companies seek to extend their online dominance. While Tencent’s origin is in instant messaging and Alibaba is predominantly an online marketplace, the push has at times brought them into direct competition for acquisitions.
The companies competed for a stake in Youku Tudou Inc. (YOKU), according to two people familiar with the matter, with Alibaba agreeing to invest $1.2 billion in the video website in April. Tencent, also an investor in ChinaVision, reduced its stake in March. Chen Liming, a spokeswoman for Tencent, didn’t immediately respond to an e-mail seeking comment.
In just over two weeks, Alibaba executives including Ma will embark on a series of investor meetings in Asia, Europe and the U.S. to market an IPO that could raise as much as $20 billion, people familiar with the matter have said. Shares will start trading Aug. 16, they said.
Alibaba had originally targeted an August listing, but held off as it continues discussions with the U.S. Securities and Exchange Commission, a person with knowledge of the matter said last month.
“I expect the SEC is going to be looking for an explanation of this situation before it lets Alibaba do its IPO,” said Paul Gillis, an accounting professor at China’s Peking University.
Florence Shih, a spokeswoman for Alibaba in Hong Kong, declined to comment.
Shares of Alibaba Pictures, whose board includes martial-arts actor Jet Li, were suspended from trading from 9 a.m. in Hong Kong today until further notice. They surged 186 percent the first trading day after Alibaba’s investment was announced in March and have quadrupled this year.
Goldman Sachs Group Inc. (GS), which is one of the six senior banks managing Alibaba’s IPO, advised the company on its purchase of the ChinaVision stake, according to a March filing. Reorient Financial Markets Ltd. advised ChinaVision. Connie Ling, a spokeswoman for Goldman Sachs in Hong Kong, declined to comment.
Less than a month after Alibaba completed the takeover, the media company said it expects to swing to a first-half loss of HK$97 million to HK$180 million. Revenue fell as much as 75 percent from a year earlier after some of its films weren’t released in the six months ended June 30, it said in a July 18 exchange filing.
Deloitte LLP acted as the auditor for ChinaVision, according the company’s latest annual report. Wilfred Lee, a spokesman for Deloitte, declined to comment.
Alibaba Pictures in June said it appointed Shao Xiaofeng, Alibaba Group’s chief risk officer, and Alibaba Group Vice President Liu Chunning to its board. The company named Zhang Qiang, a former vice president of state-owned China Film Co., as its new chief executive officer on Aug. 5.
“Alibaba Group fully supports the new management of Ali Pictures as they thoroughly review and rectify the possible financial non-compliance they have found with the former ChinaVision,” the company said in an e-mailed statement. “The new management team has a firm commitment to transparency, good corporate governance, and investor protection, and the actions they have taken are consistent with this commitment.”
The media company is entitled to 30 percent of the investment return from the blockbuster movie “Journey to the West: Conquering the Demons,” directed by Chinese movie star Stephen Chiau, according to its 2013 interim report. Alibaba Pictures has agreements to work on films with Wong Kar-wai, the award-winning auteur behind Hong Kong movies including “In the Mood for Love,” and Taiwanese director Giddens Ko.
Alibaba said in U.S. regulatory filings it faces challenges after recently making a “significant number” of deals, as it doesn’t have substantial experience integrating major acquisitions and any difficulties could distract its management.
The company was in talks to invest in Snapchat Inc., whose app lets users send disappearing messages, at a $10 billion valuation, people with knowledge of the matter said in July. Its discussions with the San Francisco-based company, which rebuffed a $3 billion takeover offer from Facebook Inc. a year earlier, have now ended, people said this month.
In June, Alibaba agreed to pay 1.2 billion yuan ($195 million) for a stake in China’s most popular soccer team in a deal struck over drinks between Ma and fellow billionaire Hui Ka-yan. The two executives agreed on terms for the deal with a 15-minute phone call June 4, after first discussing it the night before, they said at a June 5 press briefing.
Ma may take take a more cautious approach in future deals.
“Alibaba will definitely be more careful when conducting due diligence,” said Li Yujie, an analyst at RHB Research Institute Sdn in Hong Kong. “They have been very fast recently and they make very quick decisions, so maybe this will make them slow the pace a bit.”
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