Hedge Funds Starboard and Third Point Find Ways to Play Alibaba
Starboard Value’s push to have Yahoo spin off its Alibaba stake is just one way that hedge funds are playing the Chinese e-commerce giant.
Is Alibaba the new Apple for hedge funds? For well over a decade, U.S. technology giant Apple has been an almost constant favorite of many long-short equity hedge fund managers. But recent investment activity in and around Alibaba Group Holding suggests that fund managers may have a new love interest. Players such as activist investor Starboard Value and event-driven Third Point are finding more than one way to play the Chinese e-commerce conglomerate and the tech sector at large.
As always, though, timing is critical. A massive sell-off in the Chinese equity market, driven by fears about excessive valuations and margin trading, and concerns over Beijing’s ability to stem the tide, has hit Alibaba, which closed at $79.62 on July 7, down from last November’s high of $119.45. The stock had already fallen 20 percent in the first quarter of this year, after the Hangzhou-based company missed earnings estimates. The smartest way to play Alibaba this year might have been to skip it — and invest in eBay.
No such luck for $43 billion hedge fund firm Starboard Value. The New York–based activist fund and its CEO, Jeffrey Smith, have led a campaign to make Yahoo sell off its 35 percent stake in Alibaba. In March, Yahoo CEO Marissa Mayer agreed that the fading Sunnyvale, California–based tech and web services provider would do just that. Yahoo shareholders will receive stock in a new business comprising the Alibaba stake. The firm has said that it expects the spin-off to wrap by the end of the year. Starboard — which is pushing for other changes at Yahoo, including a tax-efficient sale of its stake in Yahoo Japan — and fellow Yahoo investors think the sum of the company’s parts is worth more than its current valuation.
Other hedge fund managers with a sizable Yahoo stake at the end of the first quarter included Adage Capital Partners, Greenlight Capital, JAT Capital Management, Owl Creek Asset Management and Roystone Capital Management, according to Symmetric, a New York–based data firm that tracks hedge funds’ U.S. equity holdings.
Starboard is among the hedge funds to have doubled down by also taking a direct stake in Alibaba, whose $25 billion September 2014 listing on the New York Stock Exchange was the largest initial public offering ever. As of March 30, Starboard had an $18.7 million stake. At first quarter’s end, hedge funds owned 2 percent of Alibaba’s equity capital, according to research from Goldman, Sachs & Co. That compares with 14 percent for both Yahoo and eBay, and 3 percent for Apple. Tiger Global Management, which famously got into Alibaba pre-IPO, continued to hold a $557 million position through that quarter. The New York–based firm, which manages $6 billion, didn’t have a stake in Yahoo.
One hedge fund conspicuous by its absence from Alibaba and Yahoo in the first quarter was New York–based Third Point. Headed by CEO Daniel Loeb, the $17.4 billion firm staged its own activist campaign against Yahoo in 2011, an effort that led to Mayer’s appointment as CEO. But by early last year, Loeb had completely exited his Yahoo position and resigned his board seat.
As of last September, Third Point had a $640 million stake in Alibaba, according to the firm’s 13F filing with the Securities and Exchange Commission. Loeb, who had previously written with enthusiasm about the Chinese Internet giant in a 2012 investor letter, contended in his third-quarter 2014 letter that “the success of Alibaba’s IPO shows that we are not alone in our view that the company is positioned as China’s e-commerce juggernaut. Alibaba’s metrics should appeal to growth, GARP and value investors.”
By the first quarter of this year, Third Point had sold off all of its direct Alibaba stake. At the time of its IPO, Loeb was already looking beyond shares in the company itself to its ancillary businesses, which include a cloud computing operation, a logistics joint venture and Alipay, an escrow payment service company. Loeb argued that these “hidden” assets “represent underappreciated sources of value.”
Another way that Loeb has played Alibaba is through a stake in SoftBank Corp. Headed by billionaire Masayoshi Son, the Japanese telecommunications and technology firm trades on the Tokyo Stock Exchange. Loeb, who is currently keen on equity opportunities in Japan, likes SoftBank, not least because it has its own 37 percent stake in Alibaba, which, he maintained in his May 2014 investor letter, was significantly undervalued.
If all of these riffs on Alibaba weren’t enough, Loeb has also claimed that Third Point’s work on the stock influenced his firm’s thinking about another e-commerce player, eBay. In particular, he told investors that the team’s Alibaba efforts had paid dividends when it came to eBay and PayPal, the online payment company that is about to be spun out from eBay.
“Our work on Alibaba since 2011 had persuaded us of the power of the marketplace model in e-commerce, and our work on Alipay convinced us that PayPal was an incredibly well-positioned global brand with the potential to become a leading player in mobile payments,” Loeb wrote in his October 2014 investor letter. EBay is spinning out PayPal after having been pushed by activist investor Carl Icahn, who has a $2.67 billion investment in the San Jose, California–based company, Symmetric reports.
Switching Alibaba for eBay looks like a smart move: Since the former’s IPO its stock has fallen 15.2 percent as of July 7, while eBay gained 18.3 percent during the same period. (Cupertino, California–based Apple is even stronger: It climbed 24.5 percent over that time frame, proving why it remains a staple among hedge fund managers.) Yahoo has also suffered, plunging 24.3 percent year-to-date through July 7.
Hedge funds aren’t the only investors still keen on Alibaba; it has its fans in Silicon Valley too. Iconiq Capital, the San Francisco–based family office that manages money for Mark Zuckerberg and other Facebook employees, has more than $150 million in Alibaba, according to its latest filings.