China launches antitrust investigations into Alibaba — stock takes a big drop

How does your Christmas present stack up against Alibaba’s?

On Dec. 23, the Chinese government sent Alibaba, the Chinese e-commerce giant, a holiday gift it really didn’t want — an antitrust investigation and a 13% drop in its stock price.

This is the first investigation into a Chinese internet company for abusing its market dominance — a change that could affect all Chinese tech giants.

How Jack Ma fell from Grace

Jack Ma, the English teacher turned Chinese tech mogul, once had it all…

• Founded Alibaba in 1999 and grew it into the second-largest Chinese internet company.
• Founded Ant Group in 2014, one of the largest digital payments platforms in China, and was about to take it public in what would have been the largest IPO in history.

And now, Ma may be on the verge of losing it all…

Nov. 3 — China halted Ant Group’s IPO in which Alibaba owns 33%. Reasons are unknown but Ma had criticized politically connected, Chinese banks, in a financial summit in Oct.

Dec. 23 — China launched antitrust investigations into Alibaba on possible practices used to prevent competition.

The collateral damage — Alibaba’s stock, has fallen over 40% since Ant Group’s IPO was halted.

Catch up: How Ant Group’s failed IPO took down Alibaba

The naughty list you don’t want to be in

In China, the Communist Party controls everything. Receiving a blessing from the Party could turn your company into a market leader. Getting on their wrong side could derail your company.

Over the years, Chinese internet giants have grown with limited oversight from the government. But all that is about to come to an end… In the past few months, China has strengthened its stance on regulating tech giants:

• Issued draft rules in Nov. to prevent companies from dominating the market or blocking competition.
• Issued a warning in Dec. to the largest Chinese consumer internet businesses on increased oversight and regulations.

For investors… Setting an example

Although China may be using Jack Ma to set an example, the regulations could impact other Chinese internet giants including JD, Tencent and Baidu. For Alibaba…

• The best-case scenario… No drastic changes are required and fines are issued.
• The worst-case scenario… Regulators break up Alibaba/Ant Group’s business and enforce growth restrictions.

Alibaba could also be fined a maximum of 10% of its previous year’s sales — which could be over $8b. But fines will have minimal impact on a company with over $44b in cash.

The prospect of a breakup or restrictions in growth could be much more harmful to its stock.