Alibaba.com One Two Punch Putting the Run on Investors $XHKG:0168 #alibaba $YHOO

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Alibaba (Hong Kong XHKG:0168) announced declining results for Q1 claiming they are cleaning up their act or the act of many of their vendors. The drop in recurring cash flow clocks in at a YoY drop of a mind numbing 87%. But later in the earnings release they claim their cash and bank balances improved  with a 24.3 % increase  year-on-year and flat from December 31, 2011.  Which means the spending is being curtailed somewhere or the bank loans are coming in fast and furious. In any event that needs some splaining by management.

The party line is Alibaba.com stepped up its efforts to upgrade the trustworthiness of suppliers and  enhance the user experience. They have increased staff and operating costs as they attempt to rein in some less than satisfactory market behaviours. OK so this is a classic reset of a broken business model. Some will say this is the poster child for wild west style expansion in China’s boom economy where regulators have no clue about how to regulate. Wild eyed and naïve customers had no idea they could have so many unacceptable bad customer experiences. Wondering if the translation of bad customer experience into Chinese has the same connotation or if they are using something very much stronger.

But wait no sooner were the disheartening results released than a new press release was issued by independent board members recommending acceptance of a share buy out that had been made just recently. The buy out seems generous with a 60% premium over the 60 day moving average but somewhat unsatisfactory given the last two or three-year trading range.

The combination of poor earnings results and independent recommendation puts the run on investors. There are no other possible options. But when someone who is clearly the insider is ready to offer 60% premiums you have to think in the back of your head why?

The stock becomes an allegorical tale about investing in foreign jurisdictions with different governance models. Yes the China market is huge. But western investors may not have the mindset for the nuances of Asian stock markets when a publicly traded company runs into significant trouble.

Oh wait a second Yahoo owns a signifiant amount of Alibaba. There was this really strange sale which did not seem to benefit Yahoo (Nasdaq:YHOO)  and now the minority shareholders are being run off.

George Gutowski writes from a caveat emptor persepctive.

 

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