Alibaba Receives $ 2.75 Billion Antitrust Penalty, But Shares Are Soaring

Alibaba Group shares on the Hong Kong Stock Exchange rose 7.6% amid the end of the investigation of the Chinese antitrust authorities against the company and the imposition of a record, albeit feasible, fine of $ 2.75 billion.

An antitrust investigation against the Alibaba Group (BABA), officially announced last December, culminated in a record $ 2.75 billion fine for the company for anti-competitive practices on its e-commerce platform, which includes many third-party sellers.

Restricting sellers on the Alibaba platform by choosing only one trading platform (the seller had to choose between Alibaba, and, for example, Taobao or, according to regulators in China, “excludes and limits competition” in the domestic online market.

The timeline for the completion of an investigation by Beijing regulators of about four months seems to be quite fast compared to the years it takes for such investigations in the United States or Europe. It also demonstrates the determination of the Chinese government to tighter control over the power of large tech companies in the country.

What will be the implications for Alibaba

In addition to being fined and banned from exclusive seller contracts, Alibaba is now required to file corrections reports with the State Market Regulatory Administration (SAMR) in China within three years.

SAMR said last month that 12 companies were fined for 10 transactions that violate antitrust rules. The companies include Tencent Holdings, Baidu (BIDU) and Didi Chuxing, which are among the largest technology companies in China. The company Pinduoduo (PDD) and others also came under the attention of the antitrust authorities.

The ramifications of other antitrust investigations concerning the mergers and acquisitions of Alibaba and other e-commerce sites in China remain open.

Some analysts point out regulators are also concerned about Alibaba’s ability to influence public opinion and want the company to sell some of its media assets, including the South China Morning Post, Hong Kong’s leading English-language newspaper.

The antitrust investigation against Alibaba is largely attributed to the fact that its founder, Jack Ma, who has now retired from running the company, criticized the government and financial management policies in the country. Shortly after his speech, the suspension of the potentially largest IPO in history – the financial concern Ant Group, 33% of which is owned by Alibaba Group, followed.

The impact will be negligible

However, Alibaba’s management accepted the fine with “gratitude and respect”, stating “these regulatory measures are being taken to ensure fair competition.”

The fine, despite its record size, was indeed perceived as positive by the Chinese retail giant and its investors as it removed the uncertainty factor.

At the same time, the management of Alibaba said that the measures taken will not have a significant impact on the company’s business model and its future results. The $ 2.75 billion fine was based on 4% of Alibaba’s 2019 internal revenues, but could have been higher as the law allows for a maximum fine of 10%.

“We feel comfortable because there is nothing wrong with our fundamental business model as a platform company,” said Alibaba Executive Vice Chairman Joe Tsai of the completed antitrust investigation. “We are pleased to be able to leave this issue behind.”

“We believe market concerns about Alibaba’s antitrust investigation have been addressed by the recent SAMR decision and sanctions,” Jefferies analysts wrote.

Lina Choi, senior vice president of Moody’s Investors Service, believes that antitrust measures will have a negative impact on the company in the near future: “The necessary corrective measures are likely to limit Alibaba’s revenue growth as further market share expansion will be limited. Investing in retention of sellers and upgrading products and services will also reduce profit margins. ”

However, the negative effect appears to be short-term, which means that Alibaba shares on both the Hong Kong and New York stock exchanges could rise soon after a significant decline starting in November.

Alibaba shares on the NYSE have dropped nearly 25% in the past six months, losing nearly all of their gain in 2020.

Investors can take advantage of this decline as an opportunity to buy at a lower price.

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