For US companies and investors, the September 19th IPO of Chinese technology conglomerate Alibaba truly is a “big ****ing deal,” to paraphrase Joe Biden. It also is the culmination of a behind-the-scenes battle of the exchanges, with the New York Stock Exchange victorious—delivering millions of dollars in fees to brokers, bankers, and attorneys.
An added benefit for Alibaba? A listing in New York also bestows enormous credibility in the robust U.S. market. CNBC notes that, “Alibaba's IPO is an important breakthrough for Chinese companies, which have been shunned by foreign investors since a series of accounting scandals broke in 2010…Alibaba's association with Yahoo, which holds 24 percent of its shares, has given the e-commerce giant transparency.”
According to Dun & Bradstreet, Alibaba’s $168 billion market value is more than the combined values of eBay, Twitter, and LinkedIn—or of Amazon and eBay. In addition, “More than 60 percent of the proceeds from the offering will go to company executives and early investors, including Yahoo. In other words, the IPO raised about $13.4 billion for insiders and $8.4 billion for the company itself.”
Big Benefits for Bankers, Too
When market response turned the Alibaba offering into the world’s largest IPO, the company announced its lead bankers would receive an additional incentive fee of $50 million, bringing the fee total to $300 million—an unprecedented sum.
Forbes reports that “Notably, Alibaba chose a different approach for splitting the fees…It gave each of the five lead bankers—Morgan Stanley, Credit Suisse Deutsche Bank,JPMorgan, and Goldman Sachs—a 15.7 percent share of the $250-million base fee, followed by a 7.9 percent share to Citigroup. The remaining 13.6 percent was shared by 28 lower-tier underwriters. The $50-million incentive fee was shared only by the six main banks.”
Who is Alibaba Exactly?
First, it is not the “Amazon of China.” Alibaba’s business model is fundamentally different from any U.S. e-commerce competitor. It is an advertising platform for entrepreneurs who depend upon Alibaba to generate online retail traffic—so it bears some similarities to Google.
“Alibaba doesn't operate its own online store; instead the company runs websites where millions of merchants can sell products to consumers and business customers… Like EBay, Alibaba’s online shopping sites are marketplaces where many merchants come in and sell their products directly to customers. But Taobao, Alibaba’s biggest shopping site with more than seven million sellers and 800 million product listings, doesn’t charge any commission fees on transactions. Taobao makes money because many merchants pay to advertise on the site,” according to The Wall Street Journal.
DataFox.com describes Alibaba as a Frankenstein of Google, Amazon, eBay, Twitter, Uber, and a dozen other major US tech companies rolled into one—and warns them all to be “en guard.” Here are some Alibaba companies, plus recently purchased U.S. firms:
- B2B: Alibaba
- C2C: Taobao
- Online malls: Tmall
- Microblogging: Weibo
- Video content: Youku Tudou
- TV and film production: ChinaVision Media Group
- Chat: Laiwang, Tango
- Taxi-booking: Kuaide Dache (literally, “quickly get a taxi”)
- Maps: AutoNavi
- Music-streaming: Xiami
- Mobile-specific search
- Online payments: Alipay
- Money markets investing: Yu’e Bao
- Small & Micro Financial Services Group
- English tutoring: TutorGroup
- Travel portal: Taobao Travel
- Travel deals: Qyer
- Journal app: 117go (like Instagram, but exclusively for travel)
- Visa services: ByeCity
- Appliances and logistics: Haier
- Stores: Goodaymart
- Department stores: Intime
- Cloud services: Aliyun, Alicloud
- Cloud storage: Kanbox
Alibaba U.S. Acquisitions:
- 11 Main, a US online retail site
- 1stdibs, a luxury e-commerce site
- ShopRunner, a storefront-based online shopping platform
- Quixey, a mobile search company
- Fanatics, a sports e-commerce company
- Lyft, a US ride-sharing app and a main competitor to Uber
Is Alibaba the “New Amazon?”
Alibaba has, for the moment, eclipsed Amazon as the world’s most valuable e-commerce company. In 2004, Amazon took over China-based Joyo, changed the name to Amazon China in 2011, and by 2014, it is the seventh regional website of Amazon.com after the U.S., Canada, France, Germany, Japan, and United Kingdom.
In a September 22, 2014 article, Forbes notes, “At first glance, the companies seem to have a lot in common. Both companies focus on helping people buy a vast variety of products at low prices without stepping into a store…But the similarities end there. Alibaba is not a traditional e-commerce company. It operates an ‘open marketplace’ that connects buyers with sellers… It does not sell anything directly and does not own any warehouses. As a result, Alibaba is vastly more profitable than Amazon, with margins of almost 40 percent.”
The article describes how, “In contrast, Amazon operates a ‘managed marketplace’ closer to traditional retailing. It owns massive distribution centers, sells a majority of its products directly…The downside: It has to make massive investments in infrastructure, employ legions of people, and operate on a wafer-thin profit margin.”
Forbes concludes: “Amazon and Alibaba will find it difficult to export their finely tuned business models to each other’s markets….Flush with IPO cash and a lucrative stock as currency, Alibaba will be tempted to continue its acquisition spree in Western markets.”
In fact, post-IPO, Alibaba’s chairman and founder Jack Ma has declared the company will expand aggressively into the U.S. and Europe. In the U.S., Alibaba may discover success on Wall Street does not necessarily translate into success on Main Street.
Risks for Investors
The current Hong Kong “umbrella” uprisings are just one symptom of the very real risks faced by investors with unrealistic expectations for the Chinese consumer market.
According to MarketWatch, “Even if China’s economy is growing at a brisk rate, that rate of growth continues to decelerate…Short- and long-term expectations of Chinese growth may be overstated, and, thus, the growth potential of Alibaba has been overstated too…Investors are always taking a leap of faith…that the latest trends are sustainable, but given the size of Alibaba, the risks are perhaps even more acute.”
For investors who expect the IPO price to shoot up, it is worth noting Alibaba already is a mature company and it may not continue its impressive growth rate. There is a growing shift to mobile traffic that may result in less buying activity—which could seriously affect Alibaba.
Is it a market bubble or isn’t it? A good question, answered by The New Yorker this way: “Extended valuations, new Internet stocks enjoying big gains, standards for corporate governance and stock-exchange listings declining, borrowed money getting dearer—that’s starting to sound familiar.”
Alibaba’s Impact on Global Competitiveness
In the short-term, Alibaba’s successful IPO likely will assist brands in bringing U.S. products to Asia. Plus, Alibaba has acquired immediate flexibility to use shares and cash to make more acquisitions worldwide.
Alibaba focuses on growth in China (particularly infrastructure) where the firm reportedly has an astounding 80 percent of the online retail market. However, according to Forrester Research, in the U.S. online retail industry, it could take Alibaba at least five years to compete with current market leaders.
Clearly, China—the world’s second-largest economy—has a long way to go in go in liberalizing its capital markets, expanding capital access to finance innovation, and deepening reforms.
MarketWatch notes: “Institutional investors, hedge funds, trading companies, and others lined up for a piece of the company. Neither a pre-IPO valuation at 44 times earnings nor a lack of transparency and a convoluted governance model…was enough to dissuade investors. The risk that the opaque structure might hide the proverbial ‘40 thieves’ has not put off even the cautious.”