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 $800 million just two months ago.
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 U.S. 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 may raise concerns about whether Alibaba, which analysts say could raise as much as $20 billion in a New York initial stock offering as early as next month, has been conducting sufficient research on potential takeover targets.
A deal in June, for instance, to pay nearly $200 million for a 50 per cent 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, agreed to the investment while having drinks with Evergrande's owner, a billionaire real estate developer.
Alibaba agreed in March to buy a 60 per cent stake in ChinaVision, which produces and distributes films and television programs in China, for 6.24 billion Hong Kong dollars, or $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 $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 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 emailed 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."
Deloitte Touche Tohmatsu is the film unit's longtime auditor. Goldman Sachs advised Alibaba on the acquisition, while Reorient, a Hong Kong brokerage firm, advised ChinaVision.
Alibaba Pictures said the potential accounting issues had been discovered by its new management as part of "an initial review of the company's financial and business affairs."
"The board's audit committee has therefore begun a further inquiry into the matters concerned, in accordance with an action plan approved by the board to determine the cause, impact and extent of the relevant issues," the film unit said. "It is currently uncertain how long the further inquiry will take."
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.
Mergers and acquisitions of technology companies have been soaring globally. In the first half of this year, they reached their highest level by deal value since 2000, according to Dealogic, a financial data company.
But in China, only in the past few years have companies reached the necessary size to make large deals possible. Alibaba's cash on hand doubled over the past two years, to $7 billion as of March 31, and the company has been aggressively putting that to work. Dealogic's data show that the company has spent $6.6 billion on 30 acquisitions it has announced since the start of 2013.
Here are some of Alibaba's recent acquisitions in China:
> A 60 per cent stake in ChinaVision, for $804 million.
>The 82 per cent of the Chinese mapping service AutoNavi that it did not own, for $1.1 billion.
> A 16.5 per cent stake of Youku Tudou, an Internet video company, for $1.1 billion.
>A 26 per cent stake in Intime Retail, a Chinese department store, for about $692 million.
>30 per cent stake in the Sina Corp.'s Weibo microblogging service - now publicly traded - for $586 million.
>The roughly one-third of UCWeb, a Chinese mobile Web browser maker, that it didn't own, for an undisclosed amount.
'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.''
source:Economic times
