INTERNET: Alibaba Finds New Partners in Foxconn, Social Security

By newsdoug on June 24, 2015

Bottom line: Alibaba’s new fund-raising activities are relatively small but provide insight about its future direction, hinting at a major pushes into the gadget and financial services spaces.

A couple of new fund-raising headlines involving e-commerce giant Alibaba (NYSE: BABA) show company founder Jack Ma engaged at one of the things he does best, namely making deals and forging new partnerships. Neither deal is particularly big in terms of dollar investment, but both provide some insight on the kinds of partners and tie-ups that Ma is pursuing for both the New York-listed Alibaba and its separate but affiliated Ant Financial unit.

The first of the deals is quite Japanese, and has Alibaba co-investing with Taiwan’s Foxconn (HKEx: 2038) in a robot-making venture backed by Japan’s Softbank, which also happens to be a longtime Alibaba backer. This investment looks somewhat silly on the surface, at least based on photos from the announcement event that show Ma together with the chairmen of Softbank and Foxconn, all standing behind a quirky-looking robot named Pepper. But the trio in the photos, Ma, Softbank’s Masayoshi Son and Foxconn’s Terry Gou, are 3 of Asia’s top tech names, meaning we should probably take this new tie-up at least a little seriously.

The second of the deals involves Ant Financial, and has a number of big-name domestic Chinese funds making a new investment that’s giving the company a hefty valuation of $45 billion. That’s still well below the $215 billion that the listed Alibaba is worth, but could make Ant China’s fourth most valuable Internet company behind the “big 3” of Alibaba, Tencent (HKEx: 700) and Baidu (Nasdaq: BIDU).

Let’s begin with the robot deal, which has Alibaba and Foxconn announcing they will both invest 14.5 billion yen ($117.5 million) for 20 percent each of SBRH, a brainchild of Son that produces the playful but also practical Pepper robots. (English article; Chinese article) Softbank will hold the remaining 60 percent in the venture, which is getting set to release its first batch of consumer-oriented robots in Japan this month.

This particular investment looks relatively small for Alibaba, which has spent billions of dollars buying stakes in a wide range of companies both before and after its record $25 billion IPO last fall. Alibaba’s longtime relationship with Softbank is probably the main driving force behind this particular tie-up.

But what’s more interesting is the appearance of Foxconn’s name for the second time this week making a co-investment with Alibaba. Earlier in the week, media reported that the pair were also teaming up to co-invest a combined $500 million in e-commerce company Snapdeal, in a deal that would have valued the fast-rising Indian site at $5 billion. (previous post)

Foxconn has earned a reputation as one of the world’s best-run makers of electronics for other brands, and its list of customers includes the likes of Apple (Nasdaq: AAPL). But it has also struggled with rising costs in the low-margin manufacturing business, and is looking to get into higher-margin businesses centered on developing its own brands. Alibaba is also looking to expand into the gadget space, leading me to speculate that this sudden series of co-investments with Foxconn could presage a broader joint initiative between the 2 sides in the gadget space.

Next there’s Ant Financial, which just closed a private placement that values it at about $45 billion. (English article; Chinese article) Investors in the new round are all Chinese names, including China’s National Social Security Fund. The latest valuation looks somewhat impressive, but it’s actually only up 10-20 percent from the $35-$40 billion that Ant was worth following another investment early this year. (previous post)

While some might argue that kind of growth isn’t bad for just 3 or 4 months, it’s also worth noting that valuations for Chinese companies in general have been soaring in the last few months amid a huge stock market rally. I’ve previously said that Ant is getting hurt partly by restrictions that forbid Chinese financial institutions from take on foreign investors. That means Ant has a far smaller field of big investors to choose from, giving those investors leverage to get better terms for their money.

This latest funding shows that Ant, whose central asset is the Alipay electronic payments network, can attract the big name Chinese investors and count on their support when it needs to lobby Beijing. That’s quite important as China rolls out sweeping reforms for its financial services sector, providing huge opportunities for names like Ant as they prepare to challenge the large, inefficient state-run firms that now dominate the space.