What Can A Micro-Cap Manager Learn From Alibaba? by The Royce Funds

I admit that I was intrigued by the inspiring story of Jack Ma, the executive chairman of Alibaba. Raised in a family of modest means in mainland China, by age 50 he had managed to start a company that has grown to the size of Walmart on a gross revenue basis in only 15 years.

I thought that an opportunity to hear him speak and experience the investor response was easily worth a lunch. So I attended an afternoon event on June 9 hosted by the Economic Club of New York, a fortunate opportunity offered by a broker that services Royce.

While I look at many initial public offerings, I skipped Alibaba’s, which, at a $20 billion IPO raise, fell just a little outside of the micro-cap range. (As many know, Alibaba is a Chinese Internet company that operates a significant e-commerce platform and also offers cloud computing and other services.)

Aside from learning more about Ma’s early life and formidable business success, one key takeaway from the meeting was that with Alibaba’s arrival in the U.S. comes Jack Ma’s desire to help small U.S. businesses, a feeling rooted in the knowledge, respect, and demand China’s massive and growing middle class has for U.S. products. In fact, creating a cross-border network is what Alibaba is focused on in the U.S.

When asked about U.S.-China relations, Ma suggested, among other interesting insights, that the U.S. and China would work best finding solutions to problems they can solve together and mentioned the goal of greater collaboration in healthcare, specifically in the area of disease prevention.

Ma’s enthusiasm for smaller U.S. companies and calls for more cooperation in health-related matters immediately reminded me of Harvard Bioscience, a classic “picks and shovels” micro-cap company with roots dating back to Harvard Medical School in 1901. The firm sells lab equipment, fluidics, and molecular analysis tools globally, with a primary focus on government (especially the National Institute for Health) and academia. It’s evolved from an old-school catalog business into a web-based one.

For many years, its true earnings potential and cash flow were being diverted to another division within the company. We liked the solid underlying lab business and believed the firm had considerable potential. Following a round of restructuring, rationalization, and eventual investments in sales and IT, the business began to make strides and has been adding more products.

It is also now completing the rollout of a commercial sales operation in China that will service the rest of Asia as well. The Chinese government is set to substantially increase spending on healthcare, which we believe should benefit Harvard Biosciences’ business over the next few years.

On my way back to the office, I began thinking about our investment in this company in the context of both Ma’s affection for small U.S. businesses and his desire to see more healthcare-centered cooperation between our nation and his. I found myself wondering if a small business along the lines of a Harvard Bioscience could benefit from the backing of a much larger firm such as Alibaba compared to moving into the Asian markets on its own.

Will Alibaba’s plan to offer its entrepreneurial platform to small companies change how these businesses compete and grow in China? It’s certainly plausible that small U.S. companies, especially micro-caps, could dip a toe into the Chinese market in a more measured and cost effective way with Alibaba as part of the solution. These thoughts open many potentially revealing lines of questioning with the management teams we talk to every day.

What Can A Micro-Cap Manager Learn From Alibaba Ltd. (BABA)?