The global Internet and finance community is transfixed by the Initial Public Offering (IPO) of Alibaba Group Holdings, the Chinese e-commerce giant that is expected to go public on Friday at a market capitalization in excess of $160 billion. This is likely to be the largest IPO of all time, raising up to $25 billion in capital for the company and giving a market capitalization larger than eBay (market cap, $64B) and possibly Amazon.com ($150B).
"It's insanity.com," says John Fitzgibbon Jr., Owner and Publisher of IPOScoop.com, an Internet publication covering IPOs. "It's multi-times oversubscribed. It's frenzy and it's a one-day show. It will be all over by this time tomorrow."
Road Show Frenzy
Alibaba executives have been on a Wall St. "road show," in which they travel to moneybags around the world, pitching the company, seeing who wants to invest in the IPO. It turns out that most people did. The price range of the IPO, in which Alibaba will list as ticker symbol "BABA" on the NYSE, has been steadily ratcheted up as buying pressure builds -- many fund managers have seen this as an IPO they can't miss, according to Bloomberg. Alibaba looks poised to raise as much as $25 billion.
Pricing of the shares was recently raised to the prior maximum price of $66, and it looks as if it will be raised again to $68-$70 before trading tomorrow, according to several sources tracking the IPO.
So what's this all about? First of all, it's about China, which has hundreds of millions of Internet users and represents the largest single-country geographic market on earth, with more than 618 million users as of early this year, according to the China Internet Network Information Center.
China dwarfs the rest of the world, especially in terms of mobile market share. The Chinese mobile Internet audience accounts for 80 percent of the world total, according to CNNC, via Kleiner Perkins in the slideshare below.
Alibaba has clearly been one of the most effective companies at tapping into this growing mass of Chinese consumers, most recently listing more than 230 million active buyers in its ecosystem. Alibaba is most often described as an e-commerce company, though it is also part search company, mobile technology company, platform company and payment company. It even owns cloud computing platforms. Its main brands include consumer e-commerce platforms, Taobao and Tmall; a wholesale marketplace, Alibaba.com; a payment system, Alipay; and a cloud computing platform, Allyun.com.
The company is immensely profitable, with profit before Interest, Taxes, Depreciation and Amortization (EBITDA) coming in close to 60 percent. Amazon has a negative EBITDA. Alibaba generated $6.5 billion revenue for the first nine months of 2014, up from $5.5 billion in all of 2013 and giving it an annual run rate close to $10 billion. Net profit in the first nine months was $3.1 billion. Alibaba is an immense, complicated conglomerate of many Internet businesses.
The company pitches its vast ecosystem of interrelated but separately held companies as beneficial to its overall business. For example, consumer retail partners can also use the wholesale platform to fulfill orders. All of the platforms use Alipay, Alibaba's payment systems. Among the many things it allows you to do is order hundreds of pairs of custom-designed pants.
The China Syndrome
The skeptics who are avoiding investing in Alibaba say that Alibaba's vast and complicated corporate structure, in which many of the entities will remain privately owned by founder Jack Ma, even after the IPO, offers some problems for shareholders. Chinese companies are subject to the regulation of the People's Republic of China (PRC) and don't have the same governance and regulatory control of Western companies, even though it will be listed on the NYSE. The corporate structure of Chinese companies -- and Alibaba in particular -- can be byzantine and hard to understand.
"There's always concern about any Chinese deal," says Fitzgibbon Jr.
Part of this is driven by Chinese law, which forbids foreign ownership of certain types of Internet businesses, such as Internet information services. Foreign investors are generally not permitted to own more than 50 percent of the equity interests in a value-added telecommunication service provider, for example. This leads to complicated corporate structures in which many assets are held overseas in private companies, and linked to corporate parent through byzantine financial schemes. If you think it's easy to follow, take a look at the diagram below, which comes from Alibaba's IPO filing:
Alibaba's IPO filing documents lists this as a risk factor, and it's one that investors might pay interest to. For example:
Specifically, our variable interest entities are generally majority-owned by Jack Ma, our lead founder, executive chairman and one of our principal shareholders, and minority-owned by Simon Xie, one of our founders and a member of our management. These contractual arrangements collectively enable us to exercise effective control over, and realize substantially all of the economic risks and benefits arising from, the variable interest entities."
There is also the governance issue, listed by the company as a risk factor:
We are exempted from certain corporate governance requirements of the New York Stock Exchange or Nasdaq Global Market by virtue of being a foreign private issuer. We are required to provide a brief description of the significant differences between our corporate governance practices and the corporate governance practices required to be followed by domestic U.S. companies listed on the New York Stock Exchange or Nasdaq Global Market."
These exemptions mean that Alibaba is not required to have an independent board, compensation committee, regularly scheduled sessions with independent directors or codes of ethics -- all typical requirements of stocks listed on the NYSE/NASDAQ Global Market.
"As a foreign private issuer, we are exempt from certain disclosure requirements under the Exchange Act, which may afford less protection to our shareholders than they would enjoy," the filing states.
There's also the prior history of Alibaba IPOs. That's right -- the company has gone public before. In 2007, Founder and Executive Chairman Ma took its B2B site Alibaba.com public on the Hong Kong Stock exchange shortly before global markets, including China, crashed. Shares and earnings plummeted after the IPO, and Ma later took the company private again near the original IPO price after some management controversy in which some executives were found to have defrauded customers.
Friday IPO Pop
Some of the many other risks listed in Alibaba's IPO filing include increased regulation by the PRC, fraud among its partners and customers, and the potential challenges -- both competetive and regulatory -- to the Alipay payment system, which accounts for more than 75 percent of all the transactions on its platforms.
But none of this appears to matter for the IPO Friday, as everybody clearly wants in. This is likely to be the largest IPO in US history, by total offering size. Fitzgibbon says he expects the IPO to be priced at $68 and then immediately trade up with an aftermarket premium, or pop.
That means there will be some huge winners in the Alibaba IPO, other than founder Ma, who started Alibaba in his apartment in 1999. Big investors include SoftBank and Yahoo. According to the IPO filing, SoftBank may end up owning 30 percent or more of Alibaba, depending on the total of shares that end up being sold to the public. Yahoo owned about 24 percent of the offering prior to the IPO, but is expected to sell approximately 10 percent of that in the offering and retain roughly 14 percent interest. This could net Yahoo as much as $15 billion in cash.