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Is There an Equity Wipe Out in Southeast Asia?

What the Alibaba-Lazada deal spells for Lazada’s earlier investors

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BY Marishka M. Cabrera and Tricia V. Morente - 23 Mar 2018

Is There an Equity Wipe Out in Southeast Asia?

PHOTO CREDIT: Getty Images

Doubling down on the Southeast Asian e-commerce market, Alibaba announced earlier this week that it is pumping in an additional $2 billion investment in Lazada, and will install one of its most senior executives, Lucy Peng, as its CEO.

The additional capital will bring Alibaba’s investment in Lazada to around $4 billion. Prior to the deal, the Chinese e-commerce giant had already bought a controlling stake in Lazada for $1 billion in 2016, and another $1 billion in 2017, bringing its ownership of Lazada up to 83%.

At first glance, Alibaba’s bid to take on aggressively expanding rivals like Amazon could only spell good things for the Southeast Asian e-commerce sector as a whole. Fiercer competition results in lower consumer prices, after all. And everyone has to raise their operational game. In an earlier interview with Inc. Southeast Asia, Ankiti Bose, co-founder of online fashion retailer Zilingo, related that e-commerce players actually welcome the entry of tech giants like Amazon, with its long-established best practices in e-commerce experience and delivery.

Bose predicted that having such key players gain a foothold in the market will improve and breathe innovation into the overall sector. “Only quality companies which are building a strong proposition will survive. A lot of me-too companies will die unless there is clarity of purpose — and that's great for our ecosystem,” says Bose.

The story might be a bit different in the venture capital space.

With giants like Alibaba injecting massive amounts of capital into e-commerce platforms like Lazada, and consequently controlling the vast majority of these companies’ equity, what will become of the shares of remaining investors whose pockets are not as deep?    

Recent reports do not really reveal if the $2 billion Alibaba committed is completely fresh cash or if part of the injected amount was funneled into taking out some of the remaining investors. Paul Ong, associate director at Innoven Capital, surmises, “If new shares were indeed issued, then yes, existing small investors would be diluted.”

But it’s tough to tell whether the impact of the investment was adverse, Ong is quick to point out. “Although diluted, the improved overall post money valuation of the company may have more than made up for the dilution,” he says.

Adds Kee Lock Chua, managing partner of the Vertex Ventures SEA/India fund, “While the smaller investor may suffer short term dilution, the growing top-line and capability should improve the value of their holdings over time.”

Echoing Ong and Chua’s sentiments, Justin Hall, principal at Golden Ventures, doesn’t see this move as necessarily detrimental to early investors of Lazada either. Hall posits they may have gotten “a pretty healthy upside,” though he wouldn’t be surprised if these early investors were bought out entirely.

For instance, HV Holtzbrinck Ventures, a Munich- and Berlin-based early stage venture capital firm, invested in Lazada in 2012 and in June 2017 sold all their shares to Alibaba. Kinnevik, another investor, announced in June 2017 that it intends to sell its remaining 3.6% stake in Lazada for $115 million. According to a press statement, the intended sale of Kinnevik’s stake equates to an implied valuation of $3.15 billion for Lazada.

“For those that remained, while the immediate impact on their shareholdings, especially the preferential rights in control, economics, and information, might have taken a hit, I think having Alibaba taking such an active lead role isn’t a bad thing over the long-term,” Hall says.

At the end of the day, businesses with a growing market will always require substantial investment. Chua says, “Investors who cannot make such investment will not be able to capture such growing opportunity.”

Ong also points out that while massive injections of capital by e-commerce giants like Alibaba would “certainly make investors think long and hard about a potential investment into an e-commerce business in Southeast Asia,” at least there is more clarity about who to watch. Competition in the pan-ASEAN e-commerce landscape has more or less crystallized around Alibaba and Amazon, with other country-specific players like Tokopedia in Indonesia and Tiki in Vietnam also being well-funded and backed by prominent larger players like SoftBank and

Even so, don’t rule out surprises from local players who may rise to challenge Alibaba or Amazon, Ong says. “I foresee that the Southeast Asia e-commerce battle will be much more dynamic than [what] Alibaba’s massive involvement in Lazada may suggest.”

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