A recent ranking of the top infrastructure-as-a-service companies by IT consultant Gartner had Microsoft Corporation (NASDAQ:MSFT) in second spot and Alibaba Group Holding Ltd (NYSE:BABA) in fourth place.
That’s a big deal for the Chinese e-commerce company that entered cloud computing in 2009 but didn’t get serious until investing $1 billion in its cloud business in 2015.
Jack Ma is a very big thinker, and when he sets his mind to building something, much like Jeff Bezos, he almost always succeeds. So, for me, the likelihood of Alibaba’s cloud business being a big deal in the future is virtually 100% despite Alibaba having very little cloud revenue outside China.
It also got me thinking.
Call Me Crazy
The fact that Alibaba made fourth place in Gartner’s ranking got me thinking what it would be like to combine the two companies into one massive business that could compete with Amazon.com, Inc. (NASDAQ:AMZN) across many different markets including the cloud.
Microsoft has found its groove thanks to CEO Satya Nadella’s strong leadership. Jack Ma’s ability to see the future is very similar to Jeff Bezos’.
Together, they’d be a one-two management punch that could very well overtake Amazon at its own game.
Alibaba has an ownership structure that’s very convoluted and open to interpretation. Any time you deal with a Chinese company listed on an American exchange you theoretically open yourself up to all kinds of issues.
It’s a case of buyer beware.
I won’t get into the nitty gritty of it but suffice to say buying shares in BABA stock comes with a level of risk that you don’t get buying Microsoft or Amazon.
Hedge-fund manager Jim Chanos discussed his concerns with Chinese companies in March:
“I have a big, big problem with most Chinese companies….Low returns on capital, odd accounting, flows that you can’t track, byzantine corporate structures, not the least of which is the VIE structure where Western investors don’t even own the assets….In many cases, they’re using a myriad of transactions with affiliates where you can’t really track what’s going on, or tell who controls what.”
So, even if both companies wanted to pursue a combination, I’m not even sure it could happen given there are so many moving parts at Alibaba including assets that it doesn’t even own.
Chinese Governance Issues Aside
Let’s forget for a moment the fact Alibaba hived off Alipay before its IPO to the detriment of its existing shareholders including Yahoo, whose shares now trade as Altaba Inc (NASDAQ:AABA). Instead, let’s focus on the upside of a combination between Microsoft and Alibaba.
Microsoft’s cloud business has an annual run rate of $15.2 billion, approximately 15 times Alibaba’s cloud revenue and neck and neck with Amazon. Alibaba brings to the table a very profitable e-commerce business. Together, they’d have annual free cash flow of $37.7 billion from $110.4 billion in revenue before any synergies and cost savings.
Although, I’m sure the leaders of AOL and Time Warner Inc (NYSE:TWX) thought the same thing when they merged back in 2000, only to find out in hindsight that it was one of the worst mergers in the history of corporate America.
A merger of the two companies would be the biggest deal ever, far surpassing the AOL/Time Warner debacle or any other corporate tie-up, at more than a trillion dollars.
Bottom Line on MSFT
Whether this idea is crazy or not, owning MSFT stock is not. Its business is on the rise.
As for BABA, I like Jack Ma and see him as an honest CEO who knows how to grow different kinds of companies, but I understand the hesitancy of smart people like Jim Chanos to own Chinese stocks. China is still the Wild West no matter what anyone tells you.
Will a Microsoft/Alibaba merger happen? Not on your life, but it would sure be fun to see.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
