Alibaba’s strategy through the acquisition of Youku

The latest acquisition in the Chinese E-Commerce acquisition frenzy: the giant of E-Commerce Alibaba Group’s 1.22 billion dollars purchase of a 18.5% stake in online video company Youku Tudou Inc, which is equivalent to Youtube. Founded by Jack Ma, the company have bought stakes in businesses from film production to online mapping in the run-up to Alibaba’s hotly-anticipated New York IPO.

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Each successive Alibaba buy leaves observers surprised and breathless, trying to come up with rationales. “This is an important strategic initiative that will further extend the Alibaba ecosystem and bring new products and services to Alibaba’s customers.”, said Jack Ma in Youku Tudou’s press release.

Alibaba got right in its decision of buying Youku Tudou: it could well be a wise investment. According to Barclays estimates, both companies will profit from the acquisition: merchants on Alibaba could launch ads into Youku content; Alibaba and Youku could develop a smart TV business, and the two companies could share user data, which could be very helpful. So, it is obvious that the acquisition has much to offer for both Chinese companies Alibaba and Youku.

The acquisition’s limits

However, this acquisition has its limits:

Firstly, Youku Tudou has yet to turn a profit. The company’s net losses have in fact increased over the past three years. The company lost 96 million dollars in 2013, which is “due to significant bandwidth and content costs, and capital expenditures required to ramp up our business and operations”, according to its 2013 annual report.

Secondly, Alibaba is paying a lot for an unprofitable company. The price of 30.5 dollars per share is 26% more than Youku’s shares cost before the deal was announced. Alibaba will effectively pay a higher premium because Youku will issue new shares in the deal. The deal values Youku as a whole at 6.6 billion dollars, 63% more than its recent market cap.

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Finally, Jack Ma’s private equity firm Yunfeng Capital accounted for an important part of the Youku investment, taking 2% of Youku alongside Alibaba’s 16.5%. That is quite unusual and raises questions about what roles Alibaba founders’ private investment vehicles play in the company’s overall acquisitions spree.

At the beginning of April, a firm controlled by Alibaba co-founder Simon Xie—and in which Mr. Ma also holds a small stake–bought 20% of Internet-TV company Wasu Media Holding Co. The deal was financed by a loan from Alibaba.

More information about Alibaba and Youku:

 

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