Alibaba stock slides after ex-CEO abruptly quits cloud unit ahead of IPO

By Josh Ye and Donny Kwok

HONG KONG (Reuters) -Alibaba’s stock lost more than 4% in Hong Kong on Monday after ex-group CEO Daniel Zhang quit just two months after concentrating his focus on cloud computing, raising concern over the unit’s spin-off plan and possibility of discord at the top.

New group CEO Eddie Wu will concurrently become acting CEO and chairman of a unit grappling with weak sales growth ahead of an initial public offering (IPO) penned for next year.

“We have mixed thoughts on this news,” said Morningstar analyst Chelsey Tam in a client note. “We think this latest change was not planned back in June and there are concerns of disagreements among Alibaba (NYSE:)’s partners.”

In June, Alibaba said Zhang would relinquish his group CEO role to focus on the cloud unit, the firm’s number two money spinner.

The Cloud Intelligence Group, valued at $41 billion to $60 billion earlier this year, is among five units Alibaba is spinning off as part of the biggest restructuring of its 24-year history.

Alibaba said it will continue with its plan to spin off the cloud unit under a yet-to-be-appointed management team. Earlier this year, it said it would complete the process by May 2024.

Citi analyst Alicia Yap in a note said Zhang’s departure could drag on Alibaba stock until a successor is named.

“Investors may be concerned that the timing and process of AliCloud’s spin-off may be affected.”

Alibaba did not immediately respond to a request for comment over such concern. Its share price fell as much as 4.4% to HK$86.85 ($11.08), its lowest since Aug. 23.

CLOUD AS KEY REVENUE SOURCE

Alibaba announced Zhang’s decision to exit the cloud unit in a staff letter on Sunday seen by Reuters, without disclosing reasons, and said he would set up a technology fund. The same day, Zhang handed the group CEO role to Wu and chairmanship to co-founder Joseph Tsai, as scheduled.

The cloud unit is Alibaba’s second-biggest revenue source after domestic e-commerce and houses DingTalk and the group’s generative artificial intelligence model Tongyi Qianwen.

Messaging app DingTalk is to be split off into a separate entity, two people close to Alibaba told Reuters last month.

The cloud unit’s revenue fell for the first time in January-March, by 2%, due to delayed projects and other factors. Still, analysts estimate it is China’s largest cloud provider with a 34% market share, ahead of Huawei Technologies, Tencent Holdings (OTC:) and Baidu (NASDAQ:).

Zhang, who succeeded leading co-founder Jack Ma as group CEO in 2015 and chairman in 2019, took charge of the cloud unit in December after an outage it described as its “longest major-scale failure” in over a decade.

In June, when Alibaba announced that Zhang would wholly focus on the cloud unit, he said he was doing so due to a need for clear separation between board and management as the unit pursued a spin-off. He said it would be “inappropriate” for him to continue in his group and unit roles.

Morningstar’s Tam said Wu’s appointment to acting cloud CEO could raise governance concerns and invalidate benefits that would have arisen from having different CEOs.

“For example, Alibaba Cloud’s potential customers may worry about the sharing of their data with Alibaba,” she said.

WU TAKES OVER

Still, Wu taking over and Zhang departing could mark a turnaround for a company subjected to about two years of intense regulatory scrutiny during Zhang’s tenure, analysts said.

His exit will allow the cloud business to start from a “clean slate”, said Vey-Sern Ling, managing director at Union Bancaire Privee.

Wu is one of 18 Alibaba co-founders, starting out in 1999 as technology director. He is now group CEO, chairman of Taobao and Tmall Group, a director of Local Service Group, and a director of Alibaba International Digital Commerce Group.

“Eddie Wu, being part of the original group of founders and closely aligned to Jack Ma, should bring fresh energy to the business,” Ling said.

($1 = 7.8378 Hong Kong dollars)