Locally grown is not satisfying enough for Alibaba’s palate

Contact: Mark Fontecchio

Alibaba is aggressively looking to expand its e-commerce empire beyond China, and is spending heavily to do so – its latest investment being $1bn for a majority stake in e-commerce vendor Lazada. The acquirer, which has mostly limited its purchases to China, is beginning to look abroad as the growth of its local revenue slows.

Yesterday’s reach for about two-thirds of Lazada was its first for another online retail business, according to 451 Research’s M&A KnowledgeBase. A deal of that size for online retail is rare – we count just a handful of other $1bn+ transactions in the past 15 years in that space – making Alibaba’s move that much more significant in its international push. Singapore-based Lazada also operates in Indonesia, Malaysia, the Philippines, Thailand and Vietnam.

The challenge for Alibaba will be transforming Lazada into an operation as efficient as its own. While Alibaba has 5x as many employees as Lazada, it generates 61x the sales. And it’s profitable. Lazada’s losses, on the other hand, have grown at a faster clip than its revenue (sales increased 80% to $191m in the first nine months of 2015, but its adjusted EBITDA losses more than doubled). The pickup of Lazada follows shortly behind its participation in a $500m funding round for India-based Snapdeal.

Lower than expected growth is driving Alibaba’s expansion outside its home country. Its revenue last year grew 27% to about $12.8bn, below the 33% growth rate in 2014 and much lower than in previous years. Wall Street has pounded Alibaba’s stock for repeatedly not meeting analysts’ revenue projections, sending shares down 16% from its opening day price in September 2014. Growth is increasingly difficult for Alibaba to find locally – for example, the company is setting up thousands of rural service centers to cater to areas with little or no Internet access. Thus, it is looking beyond its borders to find it.

Credit Suisse Securities advised Alibaba on its acquisition of Lazada, while Goldman Sachs banked Lazada.