The financial press was abuzz Sept. 19 with news and speculation about the highly anticipated IPO of Alibaba (NYSE: BABA), the China-based e-commerce company. BABA’s IPO was expected to rise above the offering price of $68 during the first day of trading. It did, and closed Friday at $93/share, giving it a market cap of roughly $230Bn. Founded 15 years ago, it is now one of the most valuable companies on the planet.
Yahoo!, a major partner and investor in BABA, closed the same day with a market cap of about $41 billion. Yahoo!’s 16 percent stake in BABA is now worth roughly $38 billion. Does this mean that Yahoo! is only worth the difference? The Wall Street Journal reported that analysts are valuing the post-BABA market cap of Yahoo! at about $7 billion. How could this be?
In 2005, Yahoo! invested $1 billion in cash and contributed its operation in China in exchange for 40 percent of BABA, which at the time was valued at about $4 billion. Back then, Yahoo!’s market cap was roughly $47 billion.
Yahoo! CEO Terry Semel explained the rationale of the deal saying
“the combination of Yahoo! and Alibaba is the best approach for Yahoo! to win in this region.”
Jack Ma, the past and current CEO of Alibaba added
“With the addition of Yahoo! China to Alibaba.com’s business, we’re expanding our services to provide a leading search offering to China’s Internet users. In China, Alibaba.com is winning in B2B, winning in C2C, winning in online payments and now we’re going to win in search.”
The underlining is meant to emphasize the differences in the partner’s views of the deal.
Who’s vision was realized?
It has been over 20 years since Yahoo! was founded. On roughly $7 million of venture capital raised in 1995, it went public in 1996 and ended its first day of trading with a market cap of $847 million. In 2005, nine years later, Yahoo! had a market cap of $47 billion, almost 7000x the original VC contribution of capital. That is when it made its expansion pact with BABA. This is also where their fortunes diverged.
Note Mr. Ma’s comments. He appears focused on what his customers were asking for, and layering a new technology onto a suite of existing processes and technologies to take friction out of systems and meet the voracious appetite of his fast growing customer base. In contrast, Mr. Semel seemed only focused on growing share and winning in “search” in China. He was going to win with existing technology in a new region. His thinking was logical, but in a linear way, not an exponential one.
One explanation for the speed with which BABA has emerged as a global powerhouse could be that we’ve reached the “knee in the curve” of technological advancement. The next “big thing” has arrived faster than the one that preceded it. In Yahoo!’s case, the big thing was search technology and the World Wide Web. In BABA’s case the big thing was the confluence of technologies that enabled the integration of services of great value to its customers. It will be interesting to see if BABA gives birth to an even more valuable progeny, operates its business better, or becomes out of step even faster than Yahoo!.
The link between this story, corporate venture capital (CVC), business development (BD), and Corporate M&A activities is that each contributes to sound strategic management. CVC activity capitalizes on the exponential phenomenon.
Those who embrace emerging technologies, disruptive or sustaining to the core business are to be found in the VC community. Invest, innovate or be left behind.
Reuters was the only corporate VC investor in Yahoo! in 1995. Reuters faced a changing world where its closed information infrastructure was being challenged by the World Wide Web, and the ability to get news and information from multiple outlets free of charge. While its business has changed, Reuters remains relevant in the world today. Where would it be had it not contributed its market data to Yahoo!, invested in 1995, grown a war chest on the heels of that investment, and found new ways to monetize its core business?
Ma seems to have used BD/M&A to position BABA to accelerate growth and the creation of value. He divined that markets, competitive landscapes, and customer preferences were changing rapidly and the only way to keep up was to layer technologies atop one another to remain viable.
In years to come, change will be upon us faster than in the past. Having an eye on what’s around the corner through venture investing and wisely using deal making and M&A to pivot in the face of such change can work out well.
Jack Ma struck the right deal at the right time and executed well. Yahoo! has gone through several changes in management. Linear thinking is ok on the early part of an exponential scale, as the slopes don’t diverge too much. Technology is changing that. We are at the dawn of the exponential era.