Alibaba, the Chinese e-commerce giant, said Friday that it had discovered suspicious accounting at a Hong Kong film company that Alibaba paid about $800 million just two months ago to control.
The disclosure may raise concerns that Alibaba, which is preparing what may be the biggest initial public offering in U.S. history, could be biting off more than it can chew in a spree of acquisitions.
The film company, Alibaba Pictures Group, formerly ChinaVision Media Group, said Friday that it had discovered “possible noncompliant accounting treatments” involving insufficient provision for impairments on assets, or write-downs, which were not identified. The company added that it would miss an Aug. 31 deadline to release its earnings for the first six months of the year and that its shares would be suspended from trading until its audit committee could complete an inquiry.
The accounting issues at Alibaba Pictures may lead to questions about whether Alibaba, which analysts expect could raise as much as $20 billion in a New York IPO as early as next month, has been carrying out sufficient due diligence as it vets potential takeover targets.
For example, a deal in June to pay nearly $200 million for a 50 percent stake in Guangzhou Evergrande FC, a Chinese soccer team, was wrapped up in a matter of days after Alibaba’s executive chairman, Jack Ma, agreed to the investment while having drinks with Evergrande’s owner, a billionaire real estate developer.
Alibaba agreed in March to purchase 60 percent of ChinaVision, which produces and distributes films and television programs in China, for 6.24 billion Hong Kong dollars, or $804 million at the time. The deal was completed in June. Alibaba renamed the company Alibaba Pictures and installed its own slate of directors. Last month, Alibaba Pictures issued a profit warning, saying that because of a drop in revenue it expected to book a substantial loss in the first six months of this year, compared with a profit of $18 million in the same period in 2013. The film unit also announced plans to work with respected Hong Kong director Wong Kar-wai.
Alibaba on Friday issued a vote of confidence in the film unit, describing it as the “flagship company” in its growing entertainment business.
Alibaba “fully supports the new management of Ali Pictures as they thoroughly review and rectify the possible financial noncompliance they have found with the former ChinaVision,” a spokeswoman for the e-commerce company said in an emailed statement. “The new management team has a firm commitment to transparency, good corporate governance and investor protection, and the actions they have taken are consistent with this commitment.”