The big news in Chinese-American finance this week has undoubtedly been the Yahoo vs. Alibaba spat.
If you haven’t read about it, you should!
The basics are that Alibaba transferred its profitable Alipay business (Chinese paypal) to a company controlled by Jack Ma, and Simon Xie founders of Alibaba. And now this transfer has resulted in de-consolidation of the company from Yahoos investment in Alibaba. This all came to light this year and Yahoo claim to have had no prior knowledge of this, even though they had board representation in Alibaba.
Now what’s interesting is that it appears as if 70% of the company was transferred in 2009, meaning that there would have had to be a VIE agreement in place for it to stay consolidated even at that point. Which means that the transfer of all the remaining ownership to this new structure should not have had any impact at all, it would merely be 100% VIE.
So the question really is, why did it suddenly de-consolidate?
As we have very little info to go on here it’s very hard to have any type of certainty in the predictions or warnings we get from this example. However, the current debate seems to be talking about the wrong thing.
The fact that the company transferred its ownership to a Chinese entity is not the issue, they avoided a lot of regulation by using a VIE structure, nothing strange about that.
The question investors need to be asking themselves is why, and how, the VIE structure disappeared. This could be the definitive proof of just how risky the VIE structure actually is, but as we have no information of how it was structured it’s hard to say anything for certain.
If we assume that the VIE was set up in the normal fashion then something must have happened with the contractual agreements between Alibaba’s subsidiaries and Alipay. What exactly happened is impossible to say at present, but regardless of what it was it raises some very poignant questions about the issues of VIE contracts. All we know currently is that a VIE has simply walked off the consolidated financial statements without an explanation, this in itself should be enough for anyone investing in VIE companies to start asking some serious questions.