Alibaba’s Ipo Dilemma

Alibaba’s IPO Dilemma

Introduction

• Alibaba’s Business Model

• Innovation---unique

• The financial Times elected Jack Ma “person of the year” explained its choices in the following words:

Introduction

• “Jack Ma, godfather of China’s scrappy entrepreneurial spirit, id the Financial Times’ 2013 person of the year because he personifies the Chinese Internet—with all its potential and its contradictions…In a nation whose success has been built largely on business ideas developed elsewhere, Mr. Ma is a true innovator. His contemporaries have mostly copied established business models to create “China’s google”, “China’s Amazon” or “China’s Twitter”.  But when Mr. Ma started Alibaba in his apartment in 1999, this type of business-to-business ecommerce website did not exist”

Introduction

• Business model

• e-commerce

• B2B

• B2C

• C2C

raise capital

• 1999, $60,000 from 18 friends

• 1999-2003 $25 millions from VC firms (GS, Fidelity, Softbank)

• 2004 $82 million (Softbank and other VC firms)

• 2005 Yahoo Jerry Yang agreed to invest $1 billion---40% stake—2013 buy back half for 7.1 billion.

Introduction

• Competitors:

• International:  Amazon, eBay, Google—censorship

• National:

• Tencent ---purchase 18% in Sina Weibo

• Baidu (80% of the search market)

Dual-class share structure

• Potential Problems:

• Consumption of perks

• Bad acquisitions

• Excessive risks

• However, researchers show that

• Dual-class recapitalizations outperform single-class counterparts by 21.3% in long term.

• Dual-class firms outperform in terms of stock market returns and operating performance.

Dual-class share structure

• Successful cases:

• Ford, in 2010, family own <2%, but has 40% voting power. Stock price increased from $1.58 in 2009 to $16.50 one year later.  But GM, Chrysler had to be bailed out.

• Berkshire Hathaway has dual-class share structure.  Significantly out perform S&P 500.  If an investor invest $1,000 in Berkshire, in 2012, the total value would have been 5.6 million compared to 74,000 if investing in S&P 500.

• APPL—Steve Jobs departed in 1985 causing a long-term decline of the company.

Dual-class share structure

• Dual-class share structure may have a positive outcome if it is used to improve shareholders’ wealth; however, it could lead to negative outcome if inefficient managers use it to entrench their own positions.

• One important difference between dual-class structure and Alibaba’s controlling-voting share structure is that the latter cannot be inherited or transferred.  This actually helps Alibaba to avoid the chance that the “next generation of management” may not be visionary and innovative as founders.

HKeX’S PERSPECTIVE

• As the world becomes a more global place, companies undertake “regulatory arbitrage”, i.e., they move to more beneficial regulatory systems. It is a tough decision for HKEx.

• It seems that many potential IPOs from China will opt to list in NY.  In the meantime, clear rules and investor protection were paramount to HKEx. Charles Li did not really want to “rocking the boat”. The criticism of keeping this status quo would be that it leads to a lack of innovation and creativity.

• Another feature of HKEx is that there are more less sophisticated smaller investors in this market comparing to NYSE.  

Optimal timing

• In US, companies may file for an IPO, but cancel it before offering shares to the public. About 20% of firms cancel their IPO on average.  To this extent, filing an IPO becomes an option.  But canceling an IPO delivers a bad signal about the firm.

• It is obviously most beneficial for a firm to capture a “hot” market., when the investor sentiment  and demand is high.

• Given the market is doing well and investor sentiment is reasonably high, Alibaba should go public as soon as possible.  

Results

• http://www.businessinsider.com/hong-kong-alibaba-ipo-jack-ma-nyse-2014-9