THE VIEW
The View
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Jack Ma’s Alibaba haunted by mess over Alipay

The only way to know if Jack Ma will or won’t pull another stunt like Alipay is for him to answer the questions

PUBLISHED : Wednesday, 11 November, 2015, 10:56am
UPDATED : Wednesday, 11 November, 2015, 10:56am

Every successful and revolutionary technology company benefits from a big break that vaults them over competitors. Alibaba’s 11-11 promotion is an impressive event that crowns its prowess in China’s consumer market.

But, to understand the e-commerce giant that Alibaba has become today requires an understanding of its secret history that makes so many business people still suspicious of Jack Ma.

His big break came in 2011 when he wrenched control of Alipay away from Alibaba at a time when Yahoo! and Softbank were major shareholders of the company. The transaction remains an enduring mystery in the history of the company.

In the minds of investors, the entire incident continues to haunt the reputation of Jack Ma because he has not fully explained it. Alibaba’s executives direct attention to its disclosure in its listing prospectus and focus on current news.

Other apologists shockingly spin the entire incident as a cultural misunderstanding. Then, lawyers will privately describe it as an outright theft or one of the strangest, if not outlandish corporate governance failures in history.

It is incredulous that a major corporation like Yahoo! with an army of in house lawyers could lose control of Alipay without prior knowledge; it is like having your home disappear from in front of your eyes. It is an example of the brazen deprecations and mistreatment that foreign investors can suffer in China. Now here is where the facts contradict each other so much that they become outright strange. Alibaba denied any malfeasance and says the transfer was duly discussed and approved despite Yahoo!’s explanation.

In the minds of investors, the entire incident continues to haunt the reputation of Jack Ma because he has not fully explained it

Business journalists and Silicon Valley executives still shake their heads every time they recall the incident. It is easy to imagine why Carol Bartz, the CEO of Yahoo! at the time, lost her temper when she was told that a key asset of Alibaba, a major Yahoo! investment had been misappropriated or transferred without her knowledge or approval.

If this can happen there is really nothing stopping Jack Ma from placing Tmall or Taobao into his personal portfolio.

Jack Ma’s inability to explain his actions leave them and his integrity open to doubt and speculation no matter how the share price trades. When he tried to briefly speak about the incident during their IPO roadshow his voice trembled. The company claims it was necessary to meet changing government rules, but it still fails to explain why the transfer was made with such apparent covert haste and to Ma himself. Most regulators allow sufficient time for parties to achieve compliance.

Alipay, like ebay’s Paypal, proved to be more important and valuable than their parents. Ebay found out in the 90s that a payment platform accrues most of the value of an auction site. Alibaba and its shareholders are supposed to be eventually compensated somehow by a profit share in Alipay. But, investors know that when it comes to capturing value there is no substitute for ownership.

The very development of Alibaba’s unique partnership structure for its listing suggests that it was the only way to placate Yahoo! after the Alipay incident. Yahoo! probably had the right to take legal action and even block a public listing.

Establishing a partnership structure with special powers effectively led to the creation of an attractive exit vehicle for major shareholders. To Yahoo!, it kind of represents compensation for being forced out of a big stake in Alibaba and stripped of a successful business like Alipay.

Trying to sledgehammer the damning Barron’s feature only showed the company was insecure about harsh criticism. As a Dow Jones company, Barron’s needed to be careful because their legal liability is high. It’s not easy for editors to publish that kind of article. Barron’s not only forecast a 50 per cent stock price drop, but questioned the accuracy of its financials and the integrity of management.

Other major tech companies might have sued Barron’s, but Alibaba has not yet launched legal action. Perhaps the discovery process would have revealed embarrassing facts that allow Barron’s to be protected under the fair comment rule.

Questioning Ma’s trustworthiness is not just a pedantic revival of scurrilous gossip. In today’s post financial crisis environment, conduct and reputation risk regarding the people who run a public company operating primarily in China require the insistent asking of difficult questions no matter how much ‘face’ is involved.

The only way to know if Jack Ma will or won’t pull another stunt like Alipay is for him to answer the questions.