Chinese Internet giant Alibaba (NYSE: BABA) has taken control of e-commerce startup Lazada, marking the company's biggest overseas acquisition to date. The deal also signifies Alibaba’s advancement into Southeast Asian markets as it continues to scale on a global level. The acquisition of approximately $1 billion secures Alibaba a majority stake in the Singapore e-commerce company.
Alibaba’s investment in Lazada follows a number of its recent overseas acquisitions.
The deal is part of Alibaba's plan to grow out its e-commerce with some $3.7 billion in free cash flow. The acquisition follows efforts to expand e-commerce, along with logistics, media, and entertainment. In December, Alibaba bought out Hong Kong-based newspaper South China Morning Post for 206 billion Hong Kong Dollars ($266 million). (For related reading, see: Why Alibaba Purchased the South China Morning Post.) According to Bloomberg, Alibaba can afford to spend $38 billion on mergers, acquisitions and investments in 2016 - compared to the $15 billion it spent on M&A in 2015.
A Crumbling Lazada
Lazada’s core business focuses on e-commerce of everything from home appliances to electronics throughout Southeast Asia, from Indonesia to Vietnam. The $1 billion to acquire Lazada was split in half, 50% to invest in newly issued shares, and 50% to buy from existing shareholders. Lazada was quick to preserve its business, as the startup nearly ran out of cash before the acquisition. Rocket Internet, the creators of Lazada, recently released a report showing four-year-old Lazada was indeed growing, increasing revenue by 78% to $310 million in 2015. However, the report showed Lazada was strapped for cash, incurring an unsustainable loss of $334 million, up more than double from 2014.
The Bottom Line
The deal marks a move by Alibaba to bet on strong growth in the populous Southeast Asian market. Alibaba has been on an acquisition spree in an attempt to globalize and expand products and services into e-commerce, logistics, media, and entertainment. Alibaba’s recent deal to acquire Rocket Internet’s Lazada saved the e-commerce startup. Lazada's financials showed promising growth, yet expose the fact that it's been strapped for cash due to unsustainable costs. Lazada’s financial instability was undoubtedly a critical factor in the deal that will help build a farther reaching Alibaba.