Alibaba chock-full of goodwill might lay off those deals

Taipei

ALIBABA Group Holding's latest acquisition didn't come as a great surprise. Between them, Alibaba and its affiliate Ant Small & Micro Financial Services Group already owned 43 per cent of food delivery service Ele.me.

Alibaba will take full control at an enterprise value of US$9.5 billion, it said in a statement on Monday, without stating the actual transaction price.

As Alibaba's deal count climbs, so does the goodwill on its balance sheet. By the end of December it had surpassed US$25 billion, more than 10 times the US$1.9 billion held in March 2014. Since goodwill is the premium paid above a target's book value, the purchase of Ele.me should add to this balance.

This rising figure doesn't look quite as stark when you consider Alibaba's growth. As a percentage of total assets, goodwill ballooned in 2015 before stabilising over the next few years to now sit at around 23 per cent. Ele.me will probably raise this ratio further.

None of Alibaba's peers has a goodwill-to-asset ratio that comes anywhere close. Amazon.com's stands at 10.2 per cent, eBay at 18.4 per cent and JD.com at a mere 3.6 per cent. That may say as much about those firms' less-acquisitive natures, but for sure, US$25 billion and a ratio approaching 25 per cent is a large overhang.

Companies justify goodwill by pointing to the incremental profit or cash flow brought as a result of the deal. Alibaba's continued revenue and income growth would seem to justify its history of investments and takeovers. But if the growth slows, or stops, that goodwill will become harder to support. That alone may be reason enough for Alibaba to tame its appetite. BLOOMBERG