The Alibaba Group, the Chinese e-commerce giant, has been on a buying spree since the start of last year, spending billions of dollars to acquire stakes in businesses like department stores and mapping services in China and an array of technology startups in the US.
But has the company bitten off more than it can chew?
On Friday, the company announced that it had discovered suspicious accounting at one of its acquisitions — a Hong Kong film company that it bought control of for about US$800 million just two months ago.
Photo: Bloomberg
Among the main concerns is whether Alibaba fully vetted the acquisition. The issue could complicate Alibaba’s efforts to court investors for its anticipated initial public offering of stock, which could be the biggest in US history.
The film company, the Alibaba Pictures Group, formerly the ChinaVision Media Group, said Friday that it had discovered “possible noncompliant accounting treatments” involving insufficient provision for impairments on assets, or write-downs, which were not identified. The company said that it would miss an Aug. 31 deadline to report its earnings for the first six months of the year and that its shares would be suspended from trading until its audit committee could complete a formal inquiry.
The accounting issues at Alibaba Pictures raises concerns about whether Alibaba, which analysts say could raise up to US$20 billion in a New York initial stock offering as early as next month, has been conducting sufficient research on potential takeover targets.
Photo: Reuters
A deal in June, for instance, to pay nearly US$200 million for a 50 percent stake in the Guangzhou Evergrande Football Club, a Chinese soccer team, was wrapped up in a matter of days after Alibaba’s executive chairman, Jack Ma (馬雲), agreed to the investment while having drinks with Evergrande’s owner, a billionaire real estate developer.
Alibaba agreed in March to buy a 60 percent stake in ChinaVision, which produces and distributes films and television programs in China, for the equivalent of US$804 million at the time. The deal was completed in June.
Alibaba renamed the company Alibaba Pictures and installed its own slate of directors. Last month, Alibaba Pictures issued a profit warning, saying that because of a drop in revenue, it expected to book a substantial loss in the first six months of this year, compared with a profit of US$18 million in the same period in 2013. The film unit also announced plans to work with the respected Hong Kong director Wong Kar-wai (王家衛) on future productions.
“The big question is whether Alibaba did proper accounting due diligence,” said Paul Gillis, a professor at Peking University’s Guanghua School of Management, who writes a blog about accounting issues in China. He pointed out that movie rights were the biggest asset on the balance sheet of most film companies, but the carrying value of these rights needs to be regularly adjusted based on the forecast cash flows from the films.
“It sounds like the company was not doing that correctly,” Gillis said.
Alibaba issued a vote of confidence in its new film unit Friday, describing it as the “flagship company” in its growing entertainment business.
Alibaba “fully supports the new management of Ali Pictures as they thoroughly review and rectify the possible financial noncompliance they have found with the former ChinaVision,” the e-commerce 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 broader issue highlighted by the accounting disclosure is the ability of Alibaba — and several of its peers that are also on acquisition binges — to successfully execute deals, from thoroughly scrutinizing targets to making them a financial and operational fit with the rest of the group after they are bought.
‘’Alibaba has little expertise in many of the new businesses, which means that it has to rely on incumbent managers in business decisions,’’ said Joseph Fan, a professor in the finance and accounting department at the Chinese University of Hong Kong. ‘’I suspect Alibaba, like most Chinese companies, does not have the ability to manage the increasing number of unfamiliar yet decentralized divisions and people.’’
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