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In the News

What’s with the Alibaba IPO?

Last month, Alibaba, the Chinese Internet conglomerate, made history with its initial public offering on the New York Stock Exchange. Stock commenced trading on Sept. 19 at a price of $68 a share, running up soon after to $93.89 a share, a 38 percent gain, where it closed.

At day’s end, the company’s market capitalization had reached $231.4 billion, a valuation that exceeded such giants as Intel and Pfizer. The IPO has reportedly made Jack Ma, Alibaba’s founder and chairman, China’s richest man by virtue of his holding of $25 billion in shares. The Alibaba IPO also says a lot about China and U.S. stock markets, and most, but not all, of it is good.
Alibaba’s share price is a vote of confidence in the company and in China. At a time of great uncertainty in the Chinese market — amid ripples from Beijing’s anticorruption campaign and worries by foreign companies that they may be targeted sooner or later by the Chinese government for intense and sometimes unfair regulatory scrutiny — the soaring valuation suggests that investors believe Alibaba may be too big to fail, or at least too big for Beijing and the Chinese Communist Party to mess with.

Meanwhile, the decision to launch in New York says volumes about the integration of the Chinese and the U.S. economies when political conflicts between the two governments tend to dominate the headlines.

Nearly 200 Chinese companies are listed on U.S. markets, and a number of exchange-traded funds permit investors to put their money in a basket of Chinese stocks. The two countries are deeply intertwined, and that fact will act as a shock absorber if frictions between them increase.

The rising number of Chinese companies being traded is part of a bigger story, namely the growing influence, importance and reach of a developing economy’s business giants. An increasing number of “blue chip” companies will be headquartered in emerging markets while tapping the expectations and wallets of U.S. investors.

This reflects the spread of global technology and capabilities, and demands a reassessment of global production networks. Developing countries are no longer to be valued just for low-cost labor, but increasingly for the added value to products and production processes.

Critical to this reassessment, and inherent in the Alibaba performance, is an expanding and demanding middle class in the developing world.

Alibaba is an e-commerce platform, originally for businesses, but increasingly for consumers. Last year, shoppers bought $248 billion worth of goods on the company’s retail websites, more than twice the $110 billion of goods sold on Amazon worldwide. Alibaba has 279 million active buyers — less than a fifth of China’s population — 8.5 million active sellers and an operating profit margin of 43 percent.

Those numbers are expected to grow as China becomes wealthier. Now they are merely the leading edge of a rising middle class that will make itself felt worldwide. Expect similar offerings to tap that swelling market.

For all the positive lessons, however, there are some twists in the Alibaba story. The first is the offering itself. In addition to the desire to tap U.S. investors, Alibaba listed in New York because that exchange permits companies with a complicated internal structure to sell shares.

Investors in last month’s IPO actually received shares in an entity based in the Cayman Islands. This entity does not own Alibaba assets but is contractually entitled to them. Ostensibly this allows the company to get around a Chinese law that prohibits foreigners from investing in Internet services in China — because the Chinese government considers such services to be a strategic asset.

This means that investors must trust Ma and the Alibaba board to observe that contract, especially since the Chinese law means that investors cannot count on legal protection in China itself. Ma once before removed a profit-making asset from a corporate entity — because it would violate Chinese law — at considerable cost to other shareholders. That apparently did not raise flags among the U.S. investors.

A second oddity of the Alibaba IPO concerns other companies and the “rationality” of stock markets. Two of the largest shareholders in Alibaba before the IPO were Yahoo and Softbank. They each profited well on the listing.

Yahoo made $9.4 billion on the sale of 140 million shares in Alibaba (while retaining a 15 percent stake in the company); Softbank, which had a 34 percent stake, made $5 billion on those holdings.

Yet both companies have lost value since the IPO. Softbank shares have fallen 10 percent, and Yahoo shares fell 8 percent but have recovered to chart “only” a 3 percent loss.

In the Softbank case, the loss in value reflects the view that Softbank served as a “proxy” for Alibaba; now that Alibaba shares can be traded on the U.S. market, Softbank has “lost value” for investors, even though it earned billions on the IPO.

More troubling is the fact that Yahoo’s valuation is now $41 billion — which seems odd since the company’s Asian-based assets are said tobe worth $45.2 billion. In theory, then, the company has a negative value and, the market is saying that Yahoo should be broken up. It is an intriguing signal on the eve of massive profit-taking on the part of Yahoo, and a reminder that all is not what it seems in the markets.


© LEHMAN, LEE & XU 2014.
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