The big just keep getting bigger. Today, reports surfaced that Alibaba, a Chinese e-commerce business, will increase the size of its initial public offering (IPO), which was already expected to break the record for largest stock launch in history. Alibaba, a company that offers a little bit of everything—a search engine, online auction, online retailer, a payment service, cloud computing service, and more—had enough interest to cover its IPO in just two days, with investors titillated by the prospect of the company expanding into the U.S. and European markets; the top end of the price range will now likely be above US$70 per share.
Here are six things to know about Alibaba and this decision:
1. Alibaba isn’t just another tech play, it’s a gargantuan e-commerce mega-conglomerate—and even that description doesn’t do it justice.
It’s hard to put into context just how large this company is, but here are some numbers: Last year, close to $250 billion in goods were sold through its various marketplaces. That’s more than the retail sales for all of Canada in the first six months of the same year; that’s more than flowed through eBay and Amazon.com combined. On Black Friday and Thanksgiving, all of America’s shopping sites sold three times less than Alibaba did on Nov. 11—”Singles Day,” or China’s Black Friday equivalent. Alibaba’s sites account for more than 60 per cent of the parcels delivered in China, its online payment system, Alipay, represents around 50 per cent of all the country’s online payment transactions, and 80 per cent of China’s online transactions in general are fuelled by Alibaba. Keep in mind that China is a country of more than 1.3 billion people, and that it is estimated that China has more Internet users than the United States has people.
So under Alibaba’s umbrella are the controls to the equivalent of Google’s search engine, Amazon’s small-business market, eBay’s consumer-to-consumer marketplace, Groupon’s group-buy deal service, Paypal’s transaction system and a wholesale market, too—and apparently does it all as well, if not better, than those American companies do in their own market. Little wonder, then, that investors are drooling over the idea of getting in on Alibaba, and little wonder that Alibaba would sense this and increase the magnitude of its offering.
2. Alibaba’s choice to list on the NYSE says a lot about the exchanges it said no to.
Primarily, it represents a blow to the Hong Kong Stock Exchange, given its home-court advantage—Alibaba was founded by eccentric CEO Jack Ma in Hangzou, China, after all. But negotiations to list it there fell apart, despite the efforts of the exchange’s most senior executives, over one rule: the fact that once a company is listed on the exchange, each shareholder gets one vote. Alibaba’s founders, on the other hand, sought to control the company by being able to nominate the majority of its own board. The two parties couldn’t meet in the middle, and Hong Kong finds itself with egg on its face in losing the biggest company to come out of China’s 40-year capitalist experiment. By going the route of the NYSE, Ma sidesteps the ownership question altogether.
But it also is worth noting that Alibaba also rebuffed the flirtations of Nasdaq, and that’s because it has yet to shake off the memories of several flawed IPOs, most notably 2012’s go-public offering from Facebook (whose claim to the title of priciest tech IPO, with a piddling $16 billion, will invariably be swiped by Alibaba on Sept. 19). That was widely seen as a bungled mess, with the exchange’s system collapsing under the strain of so many trades. Alibaba didn’t want that to happen again, as Reuters reports.
3. The workaround way allowing the IPO to happen is a little bit illegal.
As Marketwatch reports, investors won’t actually own any of Alibaba, but rather they’ll get a stake in a “Cayman Islands-registered entity under contract to receive the profit from Alibaba’s lucrative Chinese assets” due to China’s rule that foreigners can’t invest in some China-based firms, including those in the tech industry. (This separate tropical entity, for bafflegab lovers, is called a “variable interest entity structure.”) China’s restriction makes it impossible for foreign investors to affect any change in the business itself.
But it does make the investment much riskier. For one thing, as the New York Times writes, it’s quasi-illegal. In 2011, China stepped in to prevent Wal-Mart from using the structure to acquire a controlling stake in e-retailer Yihaodian; in 2012, a ruling by China’s Supreme Court nixed a VIE structure used by one of its largest banks. But sometimes it looks the other way; web-services company Baidu and social network Renren used that structure to get their foreign IPO. That grey legal ground, however, has not really affected investors’ ardour: Baidu, which had an initial public offering at $27 per share, is currently trading at more than $200 each. Who knows what will happen once foreigners start getting their hands on China’s biggest prize.
4. For investors, apparently, China is still rising.
There’s one obvious commonality to the top three largest IPOs in history, and that’s the fact that the three businesses had their origins in China. Alibaba’s IPO, if it reaches the scale that’s expected, would trump the Agricultural Bank of China—which had set the IPO record with a US $22.1-billion sale in 2010. And that bank, too, had in turn dethroned the Industrial and Commercial Bank of China. What does that suggest? That China, with its huge market and rapid growth, remains a sexy draw for investors. That’s despite the fact that signs suggest America’s economic engine is starting to roll again—and that China’s may be sputtering—and China’s government looks to unwind monopolies, while Alibaba sits pretty, plump, and monolithic.
5. The deal is well-timed.
The IPO market is hot. Some worry it’s far too hot. For proof, market bears point to companies like Yo—which makes an app that literally does nothing other than send missives that read Yo, and only Yo, to friends. It raised more than a million dollars of seed funding and already has a valuation of $10 million. We may not have learned any lessons, after all, from the tech bubble of the early ’90s, but Jack Ma can hardly be blamed for taking advantage of a take-all-my-money investment climate.
6. This is also encouraging news for two companies not named Alibaba.
Those companies are Softbank and Yahoo, who respectively own 34 and 22.5 per cent of Alibaba shares already, having purchased them during a private offering in 2012. A big IPO would have positive spinoffs for those companies, which may be more desirable for investors as it is easier to access those investments than Alibaba’s rapidly roiling hype machine. Investors, it seems, are already aware of this; Yahoo’s stock price is the highest it has been in 14 years, buoyed by the report that it will sell 121.73 million shares upon a successful IPO. It may even be the safer bet, as massive IPOs tend to dip in the aftermath: just look at the aforementioned Facebook for an example.