After years of ownership, shares of Asia’s technological titans are being sold by some of the most powerful organisations in the world. This is concerning news for investors following the agonising market selloff.
Following falls in the share prices of both the Chinese e-commerce giant Alibaba Group Holding Ltd. and the Indian mobile payments company Paytm, Japan’s SoftBank Group Corp. has recently reduced its shares in both companies. The firm owned by Warren Buffett, Berkshire Hathaway Inc., has been gradually lowering its interest in BYD Co., a Chinese manufacturer of electric vehicles, since 2008.
The tech behemoth Tencent Holdings Ltd. is selling billions of dollars’ worth of shares of publicly traded companies. Previously, it had stakes in hundreds of such companies. Prosus NV, the largest shareholder in the Chinese social media and gaming behemoth Tencent, is currently reducing its sizeable holding.
The smartest men seem to be walking out of the room, according to industry expert Jon Withaar, head of special situations for Asia at Pictet Asset Management, remarked.
The shareholders of large sellers frequently put pressure on them to increase returns. Cashing out their long-term assets also gives a quick means to recover from severe losses and frees up money for more beneficial uses. CEO Masayoshi Son of SoftBank claimed to have become “slightly loopy” after the company lost nearly $23 billion between April and June “when the company went on an investing binge. He promised to make cuts, and the business’s subsequent choice to sell $22 billion worth of Alibaba shares enabled it to produce a profit in the three months that ended in September.
Although many seasoned investors are reaping substantial rewards from investments they made years ago, their sales in the present market situation also reflect their longer-term vision for the tech businesses.
The next year, investors will be on the lookout for new indications of strategic shareholder divestitures.
Tencent recently announced that it would sell $23.2 billion in shares of the food delivery company Meituan in the same manner it did with a $16.5 billion holding in the online retailer JD.com Inc., through a special dividend to Tencent shareholders. This year, Tencent sold a $3 billion stake in the New York-listed internet company Sea Ltd.
The IT industry has been under pressure from the Chinese government, which last year fined Meituan more than $500 million. However, Tencent’s divestments have both a business and a political justification, according to expert John Choi.
Investors are now focusing on other businesses that Tencent owns significant holdings in, such as Kuaishou Technology and Pinduoduo Inc., according to Steve Chow, an analyst at Agricultural Bank of China International who specialises in the Chinese internet market.
On a November earnings call, Tencent’s chief strategy officer, James Mitchell, stated that when Tencent contemplates giving part of the shares it owns to its own investors, it takes into account the company’s strength, the state of the sector it operates in, and the potential returns. According to him, Tencent’s Meituan investment has yielded an internal rate of return of about 30%.
The largest technology investor in the world, SoftBank, has a long list of potential divestitures. It owns shares in the Indian logistics company Delhivery Ltd. and the Indonesian software company GoTo Group, both of which went public this year. It has already sold its shares in KE Holdings Inc., a Chinese online real estate broker, for a profit of more than $1 billion.
SoftBank increased its initial $20 million investment in Alibaba to a stake that, at its peak, was worth $200 billion. While it is among the best investments ever, SoftBank has reduced its stake in Alibaba and taken significant risks with other businesses, sometimes with terrible results.
To sell its Alibaba shares, the Japanese corporation favours employing sophisticated financing options over straightforward sales. This year, it sold $22 billion worth of Alibaba shares by unwinding a complicated derivatives position that was akin to a secured loan supported by its Alibaba shares. In the six months that concluded in September, SoftBank nonetheless recorded a loss on its investment portfolio of more than $6 billion.
Investors are mostly keeping an eye on SoftBank and Tencent, but there are other prospective sellers who might enter the market in 2019. A similar business called Ant and Alibaba both have sizeable tech investment portfolios. Sequoia Capital and Tiger Global Management LLC, two funds, have placed significant wagers on Asian technology.
According to a Prosus spokesperson, the company’s decision to sell its Tencent shares has not changed its opinion of China or Tencent and it still wants to remain a long-term shareholder. “We are firm believers in Tencent and are very bullish on its prospects,” he said.
Given that many companies’ lockup agreements are expiring this year, Indian stocks are an obvious source of divestments. In November, SoftBank raised $200 million by selling a portion of its ownership in the mobile payments business Paytm. Both the Chinese fintech firm Ant and the American ride-hailing firm Uber Technologies Inc. sold stock in Zomato Ltd. this year, which specialises in food delivery.
Subhrajit Roy, head of global capital markets for India at Bank of America, noted that the enormous pool of domestic investors in India who are interested in buying shares offers a strong buffer for international investors who can simply exit their positions if necessary.
Banks have been let down by the divestment structure this year, with many of the largest transactions taking the shape of open-market share sales or special dividends. The extent of block trades, in which banks sell several shares to institutional investors in exchange for a fee, is expected to remain limited in 2019, according to many bankers. According to a news site, the global block-trade volume decreased 67% to $61 billion this year through November 30 from $185.8 billion over the same period in 2021.
A key element will be how volatile the stock market is.
“The market this year has been very volatile, with people now holding different bearish and bullish views for next year,” said James Wang, co-head of equity capital markets for Asia excluding Japan at Goldman Sachs. “Regardless, if you are an investor holding a large chunk of stock, say in the billion-dollar range, you do want to take some risk off the table.”
Block trades, follow-on offers, and convertible bond issuance, according to Mr. Wang, may increase in the first quarter of 2023. According to him, this would then lay the framework for initial public offerings to resume as early as the end of the second quarter, which is some good news for bankers.
Pan Finance is a print journal and news website providing worldwide intelligence on finance, economics and global commerce. Known for our in-depth analysis and opinion pieces from esteemed academics and celebrated professionals; our readership consists of senior decision makers from across the globe.