STOCKS: Alibaba Dumped By Softbank, Lenovo by Google

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Bottom line: New sales of Alibaba and Lenovo shares by big stakeholders partly reflect disappointment in each stock’s performance by the seller, as both companies face issues that could stunt their medium-term growth.

Big stakeholders sell Alibaba, Lenovo shares

The folks at e-commerce giant Alibaba (NYSE: BABA) and PC leader Lenovo (HKEx: 992) are licking their wounds today, after each was dumped by a major major shareholder. In the first case longtime backer SoftBank has just sold off a big chunk of its Alibaba holdings, raising a hefty $7.9 billion in the process. The second deal has Internet giant Google (Nasdaq: GOOG) looking to sell about $200 million worth of Lenovo stock. Alibaba and SoftBank are trying to put a positive spin on their development, but the bottom line is that both Alibaba and Lenovo stock have become disappointments recently for all investors.

Let’s begin with Alibaba, which counts SoftBank as one of its earliest backers in a relationship that dates back 16 years. SoftBank was already one of Alibaba’s largest stakeholders when Yahoo (Nasdaq: YHOO) made its landmark $1 billion investment that gave it 40 percent of Alibaba in 2005. Even as the Yahoo relationship later soured and the US Internet company ultimately sold down its stake, SoftBank remained a steadfast investor and held onto its shares until now.

SoftBank’s newly announced share sale  will take its stake in Alibaba from a previous 32 percent down to 28 percent, it said in a statement. (company announcement; English article; Chinese article) Of the total $7.9 billion the sale will generate, $5-$6 billion come from private placements, while Alibaba itself will buy $2 billion worth of the stock. A group of Alibaba executives including founder Jack Ma will buy $400 million worth, and an unnamed sovereign wealth fund will buy another $500 million.

Both sides are pointing out that SoftBank will remain Alibaba’s largest single shareholder even after the sale, and analysts are also noting that SoftBank is in need of cash. But at the same time, we need to point out that Alibaba’s stock has been a major disappointment since the company’s record-breaking $25 billion New York IPO in 2014.

Alibaba’s shares tumbled 6.5 percent after news of the sale came out, and at their current levels are about 13 percent above their IPO price of $68. That translates to an annual return rate of around 8 percent, which is far below the breakneck growth in its valuation that the company saw in the 5 years before its IPO.

I personally believe that Alibaba’s shares are a bit undervalued right now due to this sale and other major negative stories surrounding the company since the IPO. Perhaps SoftBank believes that too, but this particular sale shows it wasn’t prepared to wait around indefinitely for investors to finally discover Alibaba’s true worth.

Legacy Shares

Next there’s Google, which received the Lenovo shares it’s now selling when it purchased smartphone maker Motorola from Google for $2.9 billion in 2014. A Reuters report cites unnamed sources saying Google is looking to sell 371 million Lenovo shares for HK$4.56 to HK$4.62 each, representing a discount of up to 4 percent from the stock’s last close. (English article; Chinese article) The sale would raise around $220 million in cash.

That amount is tiny for a company like Google, and this sale most likely coincides with the end of a lock-up period assigned to the shares when they were given to Google. Lenovo’s shares have lost more than half their value since the Motorola deal was first announced after it failed to turn around the struggling brand. That means Google’s Lenovo stake is also probably worth far less now than when it first received the shares.

Lenovo often uses its stock to help pay for its many overseas purchases, and other big names like IBM (NYSE: IBM) and NEC (Tokyo: 6701) have dumped similar-sized Lenovo stakes when their own lock-up periods ended. At the end of the day, this particular stake sale was probably expected by people who follow Lenovo closely. But it does extend a string of negative news for the company, and the 4 percent discount indicates there’s not much appetite in the market for Lenovo shares these days.

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