Floating that big idea
Alibaba broke records when it went public on the New York Stock Exchange last week, but Chinese internet firms still face challenges, writes Ariel Conant.
Alibaba made history over the weekend with the largest initial public offering (IPO), at US$25.03 billion, on the New York Stock Exchange.
An IPO is when a private company sells its shares to the public for the first time and Alibaba's was one of the most anticipated in history. At the initial sale, Alibaba and several shareholders sold 320.1 million American depositary shares, priced at US$68 each.
The deal size was increased by an additional 15 per cent after underwriters - the people and banks who organised the share sale - exercised their "greenshoe" option following strong demand. That meant selling 48 million more shares from Alibaba, Yahoo! and Alibaba co-founders Jack Ma and Joe Tsai, according to Reuters.
On its Friday debut, Alibaba shares rose by a record-breaking 38 per cent. Closing with a market capitalisation of US$231.4 billion, the company has surpassed other major players like Facebook, and is now larger than its two main American competitors - Amazon and eBay - combined, according to Bloomberg.
The sale also surpasses the previous IPO record held by the Agricultural Bank of China, a US$22.1 billion offering in 2010.
Alibaba's record-breaking issuance clears the way for the October IPO calendar. Due to Alibaba, according to The Wall Street Journal, IPO issuance has already surpassed last year's total; around US$69 billion has been raised so far this year, compared to US$62 billion for the whole of 2013.
"There is some buying power out there," portfolio manager at Morgan Stanley Wealth Management, Andrew Slimmon, told The Wall Street Journal. "The market is going to have a good fourth quarter, because we have cleared some hurdles here."
October is usually a busy month for IPOs and the Alibaba sale has analysts predicting a bright future.
"It's a good thing when you have a healthy IPO calendar," chief investment officer at First American Trust, Jerry Braakman, said in a report in The Wall Street Journal. "Companies and investment bankers think it's going to be a strong market, so it's a bullish indicator."
While market analysts are optimistic about IPOs in the coming months, many doubt the staying power of Alibaba's value. Alibaba's location gives it an advantage in terms of consumers. Forbes estimates China has 560 million internet users and an internet market double the size of the US.
The Wall Street Journal reports that on a single day last year, Alibaba's sites were used by nearly one-third of all adult mainlanders who spent more than US$5 billion online. With a range of sites, Alibaba offers mainland online shoppers similar services to US "e-tail" giants. The company's Taobao portal is similar to eBay, providing a selling platform for individuals or small businesses.
Tmall, also owned by the Alibaba Group, has global brands, and operates much in the same way as Amazon. And because of all the bases it covers, Alibaba already surpasses Amazon and eBay combined in transaction volume. The company's mission is "to make it easy to do business anywhere".
Despite Alibaba's sales volume, some doubt it can maintain its leading position on the mainland's competitive online economy. Other e-commerce companies there have seen diminishing margins since their openings.
Forbes reports Baidu's opening margins dropped from 39.3 per cent in 2011 to 30.1 per cent this year. These numbers make analysts sceptical of long-term investment, even after a record-breaking IPO.
And foreign investors are also concerned about the central government's regulations. Beijing restricts foreigners from owning a majority interest in "strategic and emerging industries", including internet companies.
To get around this regulation, mainland companies offer shareholders "variable interest entity" rights. For Alibaba, this means a shell company in the Cayman Islands giving shareholders contractual rights to profits, says The Wall Street Journal.
In June, the US-China Economic and Security Review Commission issued a report which called such arrangements an "intricate ruse". The report said that variable interest entities were "a way of making the business appear to be Chinese-owned to Chinese regulators while claiming to be a foreign-owned business to foreign investors. Neither claim is technically true."
Even Alibaba recognised that the central government might not look favourably on its arrangement. Beijing, it said, "deems that the contractual arrangements in relation to our variable interest entities do not comply with PRC governmental restrictions".
It added there was a possibility that Alibaba may "be forced to relinquish our interests in those operations".
But Alibaba executives are confident that the level of foreign investment will be enough to stave off interference from Beijing. With a market capitalisation of US$231.4 billion, Alibaba is now the fourth largest tech company in the world.
Market Capitalisation (in billion USD)