Alibaba IPO

Imagine a pony show, with trainers parading their talented ponies before judges. Most are one-trick ponies, some perform two tricks, and even fewer perform three.

But then comes one trainer with a pony that blows them all away with not five tricks, nor ten, nor even fifteen… but 25. The pony’s name? Alibaba.

Starting with a single company of 18 people in a small office in mainland China in 1999, founder Jack Ma has grown Alibaba Group Holding Ltd. into a portfolio of 25 e-commerce giants, employing 24,000 people in more than 70 offices in China, India, the U.S., and the U.K.

Now this multi-facetted internet company of companies is about to take its pony show on the road as it prepares to file its highly anticipated $15 billion initial public offering on the Hong Kong Stock Exchange, comparable to Facebook’s (NASDAQ: FB) $16 billion outing.

But with so many internet IPOs getting into trouble the moment they set foot into the most exacting pony show of all – the equity market – does Alibaba have what it takes to securitize its multi-trick pony and make money for its investors? Will an IPO even be launched, given the company’s insistence on voting control, which is not permitted in Hong Kong?

Contesting Conditions on Company Control

While the company’s executives had hoped for a less expensive Hong Kong listing, they may end up applying to New York’s NASDAQ instead.

It all hinges on a contentious issue that is commonly debated when a company prepares to go public… will the founding management maintain a controlling interest in the new company? It is an especially legitimate concern for companies that are highly dependent on the skills, creativity, and vision of a small group of founders.

“We believe that only a group of people who are passionate about the company and are mission-driven will be able to protect the company from external pressure from competition and temptation to seek short-term gains,” Ma wrote in a staff letter obtained by the Financial Times.

While shareholders would be permitted to vote on the dismissal of individual board members, Ma and other company co-founders, including vice-chairman Joe Tsai and chief executive Jonathan Lu, want to retain control of the replacement nominations.

However, the Hong Kong Stock Exchange does not permit dual-class share structures, where one class has greater voting authority over another.

“We are not concerned about where to go public,” Ma clarified in his staff note. “But we do care that wherever we end up going public must support this type of open, innovative, responsible culture that values long-term development.”

Seeing as the HKSE is not expected to change its listing requirements, the Alibaba Group remains open to a listing in America. It just means investors will have to wait a little longer before getting their hands on the stock, as the December 2013 Hong Kong IPO would then be postponed to perhaps a February 2014 NASDAQ offering.

But time is of the essence, as the company must purchase half of Yahoo’s 24% stake in Alibaba by the end of 2015, which would require some of the IPO’s proceeds.

A Tour de Force

So what do you think of the pony show so far? Have you been impressed by the achievements of older internet companies like Amazon (NASDAQ: AMZN), PayPal, Ebay (NASDAQ: EBAY), and Google (NASDAQ: GOOG)? And are you enticed by the potential of the newer web darlings like Facebook and a whole host of cloud computing companies?

Well, when Alibaba finally gets its show on the road, it will be like a lavish Las Vagas extravaganza that makes all those other companies look like dancing poodle shows.

The Alibaba Group is a holding company sitting on a collection of 25 different internet companies built and organized around e-commerce. So far, only one of those holdings – the business directory Alibaba.com – has gone public, trading on the Hong Kong Stock Exchange since 2007. But now the time is ripe for the entire portfolio to be auctioned off into the public investment domain.

What gives the offering such potential is the company’s enormous coverage of the e-commerce space. It doesn’t have just a single specialty, but covers all the bases, like a baseball team with a player in every section of the park.

At its website, the company gives us a sense of just how well its companies fit together for a remarkably complete coverage of the e-commerce field:

“Since its inception, [Alibaba Group] has developed leading businesses in consumer e-commerce, online payment, business-to-business marketplaces and cloud computing, reaching Internet users in more than 240 countries and regions…[It is] an open, collaborative and prosperous e-commerce ecosystem.”

The company next lists its eight largest entities, comparable to some of the largest internet names out there:

• Alibaba.com International: Global e-commerce platform for small businesses; English-language platform for cross-border trade; 36.7 million registered users from more than 240 countries and regions; more than 2.8 million supplier storefronts.

• Alibaba.com China: Domestic e-commerce platform for Chinese small businesses; 77.7 million registered users; more than 8.5 million supplier storefronts.

• AliExpress: Global e-commerce marketplace for consumers; more than 54 million products in 26 major product categories; 7.7 million registered users in more than 200 countries and regions. [Comparable to Amazon.com]

• Taobao Marketplace: China’s most popular C2C online shopping destination; more than 800 million product listings and more than 500 million registered users; one of the world’s top 20 most visited websites. [Comparable to e-Bay.com]

• Tmall.com: China’s leading B2C shopping destination for quality, brand-name goods including L’Oréal, adidas, P&G, Unilever, Gap, Ray-Ban, Nike and Levi’s; catering to increasingly sophisticated Chinese consumers.

• eTao: Comprehensive shopping search engine in China; product search, rebates, coupons, group buy search; more than 1 billion product listings; more than 5,000 business-to-consumer and group shopping websites; more than 200 million pieces of shopping-related information. [Comparable to Groupon.com]

• Alibaba Cloud Computing: Developer of platforms for cloud computing and data management; supporting the growth of Alibaba Group and the whole e-commerce ecosystem by providing a comprehensive suite of Internet-based computing services.

• Alipay: Most widely used third-party online payment platform in China; more than 170 financial institutions including … Visa and MasterCard; more than 460,000 merchants; transactions in 14 major foreign currencies. [Comparable to PayPal.com]

Imagine combining the likes of Amazon, eBay, PayPal, Groupon (NASDAQ: GRPN), and others into one single stock. That’s what Alibaba will soon make available to investors around the world.

An IPO to Watch

In 2012, the combined gross merchandise volume (GMV) of just Taobao Marketplace and Tmall.com exceeded RMB1 trillion, some U.S. $163 billion. That’s one-sixth of a trillion dollars of sales from just two of its 25 companies in a single year.

By comparison, Amazon reported $61.09 billion of gross revenue in 2012, Google reported $50.17 billion, eBay reported $14.07 billion, while Groupon brought in $2.33 billion – the four combining for $127.66 billion, or some 78% of just two of Alibaba’s 25 companies.

We already know that China and India are among the nations with the fastest growing middle classes, with a combined population of 2.57 billion between them, or 36.2% of the human population. Alibaba already has them searching and shopping on its network of interconnected and complementary e-commerce websites.

And analysts touted Facebook’s potential? A company that is still struggling to monetize its membership-base? Alibaba’s pony is going to dance circles around all the one-trick ponies we’ve seen so far.

Joseph Cafariello

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