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Introduction

Business research, investment banking analysis, and credit portfolio advisory includes study of global technology giants. Management consulting firms focus on providing high value-added services to companies, families, and investors operating across different market segments. Investment banking analysts work with clients across the US, Europe, Latin America, and Asia. Another related work area includes Alternative Asset Management, wherein the work profile includes developing investment strategies covering direct investments, fund of funds, co-investments, and secondaries across different asset management classes like, private equity, active funds, private debt, infrastructure, real estate, and venture capital. While providing advice on M&A, debt advisory, financial restructuring, and capital markets transactions, investment bankers work on various aspects including transaction execution, structuring, pricing, modelling and data enhancement in relation to credit portfolios and banking platforms. 

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Alibaba Group Case Study

Alibaba Group is one of the most dominant players in the digital world and has set world class standards in the global ecosystem. Alibaba’s innovation speed is evident by the fact that by the end of 2020, Alibaba is expected to be the largest patent holder for blockchain related patents. However, such business growth comes with its own set of challenges, such as, lawsuits across different jurisdictions. Recently, a class action lawsuit has been filed in the US against Alibaba Group. 

Alibaba Group Business Overview

Alibaba Group Holdings Ltd. (BABA) was established in 1999 by a group of people led by a former English professor, Jack Ma, who led the company’s meteoric expansion before resigning as Executive Chairman in September 2019. The first founders reckoned that the Internet would be a big leveller, facilitating small industries to influence innovation and technology to thrive and compete successfully in the domestic and worldwide markets. Alibaba was created from that perception and has since evolved into a worldwide e-commerce enterprise, Internet, and technology company. The enterprise published a net income of $19.8bn on $72.0bn of income in the 2020 Fiscal Year (FY), which ceased on March 31, 2020.

 

Alibaba has an existing market capitalization of $554.2bn. Alibaba pursued Amazon’s model by broadening into industries that expand its basis of supply hubs. But Alibaba has also adopted the example of different FAANG technology enterprises by spreading out into different apps and tech services. This development is indicated in Alibaba’s wide collection of subsidiaries. Alibaba’s distinct group of tech industries contain online retail, like the mobile commerce site Taobao Marketplace and Tmall, a third-party online and mobile commerce outlet for labels and traders, online global marketplaces Alibaba.com and AliExpress, logistics assistance like Cainiao Network, a logistics data forum, and global fulfillment system, consumer aids like on-demand release and a local assistance outlet Ele.me, and a restaurant outlet Koubei, cloud computing through Alibaba Cloud, monetary assistance, like Ant Financial and payment aids platform Alipay and Amap, a mobile digital outline that gives navigation and real-time traffic data. 

Alibaba Group Legal Structure

For many years, the government for the People’s Republic of China has had considerable embargoes on Foreign Direct Investments (FDIs) in the country, to maintain the holding of Chinese-originated industries in the hands of the Chinese. To get capital from American investors or other investors beyond China, Chinese company executives have started to develop Variable Interest Entities (VIEs) that are built to simulate the consequences of foreign stock possession. But this is not the same as “Actual Ownership.” 

Variable Interest Entities

A Variable Interest Entity (VIE) is a kind of legal business arrangement or structure where an investor has a controlling interest without any majority of voting rights. Some of the elements of this structure include a design where equity investors do not possess adequate resources to aid their ongoing operations in the business. In most instances, the VIE is established to preserve the business and protect it from creditors or any legal prosecution. A business that is the main recipient of a VIE must release the holdings in its consolidated balance sheet. Thus, VIE is incorporated as Special Purpose Vehicles (SPVs) to inertly retain monetary assets or to aggressively carry out research and development.

 

Alibaba in its capacity as an e-commerce company practices a VIE structure that enables U.S. citizens to buy VIE shares in Alibaba through the New York Stock Exchange (NYSE). From September 2014, to 2019, the price of the share rose from 38% to about 163%, or 21.36% 5yr compound yearly growth rate.

 

In 2000, Sina Corporation divided itself into three divisions. When it acquired money from American investors, it put the funds into a low-tax, offshore entity in the Cayman Islands. It then gave that holding company complete ownership of a fully foreign-owned entity that has its dwelling in China. From there, the foreign entity reaches an agreement with the parent company which fractions particular voting rights, dividend rights, and rights to obtain dividend distributions. When an entity purchased shares of Sina, they possessed an offshore holding business that utilized a straw mediator that reached contracts to obtain typical stock advantages and characteristics from the parent company itself. These aspects govern the present climate for VIEs considerably. Since an American investor in Alibaba obtains his “Ownership” via contract standards rather than principles of equity ownership, the enterprise depends on Alibaba’s power to contract and recognize the advantage of their investment.

 

In case of any legal dispute, an American investor who gets their interest in Alibaba withdrawn, have three feasible areas for a lawsuit.

 

(1) They can prosecute in China, but because there will be a regulatory decision of the interest through the contract was void, the Supreme People’s Court of China doesn’t condone Western investors.

 

(2) The investor can charge them in the Cayman Islands, but since Alibaba’s existence in the Cayman Islands only persists to the degree that it can aid the straw entities, Alibaba can simply withdraw from the country completely if these VIEs drop.

 

(3) Finally, there is the prospect of prosecuting in the United States. The VIE agreements state that they can only settle conflicts in China and the Cayman Islands. The Circuits in the U.S. courts have determined that if a global agreement prescribes the jurisdiction where the conflict will be settled, then that location must prevail.

 

The Supreme Court has normally asserted that it can’t establish a venue in the United States that the contracting parties did not consider if there is a “means of redressing the grievance” in the location that is the content of the agreement. The investor can theoretically redress their grievance before a Court in China, but there is no clarity on how qualitatively the Supreme Court will deal with the grievance.

US Business Models

While individuals recognize that Alibaba (BABA) is an online retailer that is identical to Amazon (AMZN) or eBay (EBAY), the company’s business model is very different from the principal e-commerce industries in the United States. Alibaba has conventionally been known in America for Alibaba.com – its B2B portal that unites Chinese factories and businesses. Whereas Amazon is held under a single structure, Alibaba is distributed into three fundamental industries. These e-commerce sites unite different kinds of buyers and sellers, allowing Alibaba to be a middleman in China’s developing e-commerce business. What’s essential to note is that Alibaba’s platforms only encourage the transactions. They monitor the marketplace and levy a commission, but don’t keep – or sell – any commodities themselves. Unlike Amazon, Alibaba Group possesses no inventory and has no warehouse.


However, Alibaba has generated software platforms that encourage the transaction of goods and services. While Alibaba’s income is less than Amazon’s, it has elevated functional and profit margins. This is because Amazon has to accomplish the costly and composite logistics of creating and preserving a network of warehouses to transport products straight to shoppers. Thus, the software is easier to measure than warehouses. While both Alibaba and Amazon receive information from customers who use their market as a place to purchase goods, the outcome behind the information is very different.


Amazon does not disseminate the information with third-party traders or brands as Amazon tries to create revenue and contend with their partners. Alibaba, on the other hand, disseminates this information with brands to allow them to make more sales on the platform. In its most rudimentary form, Amazon is a retailer whilst Alibaba is a platform. An individual can consider Alibaba’s Tmall as a big online mall that offers brands with branded storefronts that are supervised by brands. Alibaba makes most of its income from promotions and commissions from transactions. As Alibaba is platform commerce, the better partner brands perform, the better Alibaba does as interests are affiliated. Big brands like Mondelez, L’Oréal, Mattel, and Gap can leverage Alibaba’s platform to enhance their brand in China via collaborative shopping and social media. In the West, the connection between social media and business is one that nearly seems illogical, yet in China, big international brands utilize information on social media to motivate sales.


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