The world’s largest initial public offering (IPO) has dominated the market headlines this week. Alibaba, China’s biggest e-commerce company, has raised a total of US$25 billion on the New York Stock Exchange (NYSE). Alibaba began trading on Friday 19th September with shares opening at $92.70 per share, 35 percent above the $68 forecast. Jack Ma, the former English teacher who founded Alibaba in 1999, is now China’s richest man with an estimated net worth of $24.6 billion. So what is all the hype about?
Alibaba is China’s biggest e-commerce corporation, which lets individuals and small businesses buy and sell through a variety of web businesses. Acting as a connection between buyers and sellers, Alibaba keeps costs low by leaving the process of selling, inventory and distribution to third parties. As it doesn’t directly sell anything, Alibaba generates revenue through advertising and membership services. For this reason, it has been often compared to eBay and Amazon. However, transactions on its online sites totalled $248 billion last year, more than those of eBay and Amazon combined. Alibaba’s offerings are also wider, having expanded into areas such as e-payments (think PayPal) and financial services. Credit Suisse, Deutsche Bank, Goldman Sachs, J.P. Morgan, Morgan Stanley and Citigroup acted as underwriters for the offering. Combined, they netted more than $300 million, equivalent to 1.2 percent of the deal. The banks exercised an option to buy another 48 million shares to meet high investor demand.
Alibaba’s online model appeals to the consumer spending power of a rapidly expanding Chinese middle class. Alibaba dominates 80 percent of China’s online shopping market and online spending by Chinese shoppers is predicted to triple from its 2011 size by 2015. With Alibaba’s 280 million active buyers visiting its various sites at least once a month on smartphones and other mobile devices, investors are attracted by these increasingly popular online shopping methods. Investors have also noted seemingly unlimited potential in untapped markets such as rural China, where half a billion residents are yet to receive internet access.
So what’s next for Alibaba? Ma has global ambitions. Alibaba has declared its intention to expand into emerging markets, followed by Europe and the US, where they have yet to make their name known. An Ipsos poll found that 88 percent of Americans had not heard of the company prior to its IPO. This is likely to change as a result of sales pitches made over the past two weeks by executives across the US highlighting Alibaba’s strong revenue and big ambitions. Alibaba has recently opened ‘11 Main’, its new US shopping site for high-end boutique products spanning clothing, home goods and jewellery. Its foray into the US market signals its attempt to compete with companies such as Etsy and Wal-Mart, and to achieve recognition in Western markets.
However, underlying all of the hype are causes for concern. On its second day of trading on the NYSE, shares were down more than 4 percent. Time will tell if Alibaba’s stock is inflated – part of another tech bubble.
In addition, Alibaba’s partnership structure is both complex and unusual, which could cause concern among investors. The partnership, despite holding a minority of the company’s equity capital, controls the activities of the company without the need to consult other shareholders. This means that a small group of insiders can nominate over half of Alibaba’s board members. For this reason, the regulators of the Hong Kong stock market rejected Alibaba last year, which undermines confidence in Alibaba’s governance structure. Consequently, Alibaba investors will have minimal shareholder impact.
There is also an element of political risk. Like every other company in China, Alibaba is ultimately at the mercy of the Chinese government. One of its primary risk factors is how the rules governing the marketplace in China could change. The communist economic system, which restrains the economic and social power of technological monopolies, could jeopardise Alibaba’s success. The stronger the ties to government – who will have a vested interest in Alibaba’s success – the greater chance that this risk is offset.
Since Chinese law forbids foreign ownership of company assets, investors are not actually buying Alibaba’s shares directly. Investors are buying shares in a variable interest entity which is registered in the Cayman Islands. There is concern about the way Alibaba is headquartered in China but incorporated in the Cayman Islands. Chinese companies are increasingly using the NYSE and NASDAQ markets to raise money and gain international exposure. With very little presence in the U.S. the positive effects deriving from the IPO are being felt in Asia. The lack of information available about foreign shell companies compared to domestic could increase investor risk. Caveat emptor…