Alibaba'IPO

Alibaba’s IPO
The journey of 102 years begins
At long last, Alibaba reveals details of its massive public flotation
Sep 6th 2014 | SHANGHAI | Business and finance
“DEAR investors,” begins the letter from Jack Ma, a remarkable Chinese entrepreneur who has risen from an obscure life as a teacher to become one of the world’s richest businessmen. “If you invest with us, you will be embarking on a journey with Alibaba.” The missive from Mr Ma (p ictured), the founder and chairman of China’s largest internet firm, is part of an amendment to the firm’s prospectus filed on September 5th with America’s Securities and Exchange Commission. This long-awaited update reveals the most anticipated bit of fin ancial news in a long while: how much Alibaba’s shares will cost during its forthcoming initial public offering (IPO) in New York.
The answer surprised many. Alibaba is pricing its offering at between $60 and $66 a share. That could lead to a valuation of the firm above $160 billion, surpassing the one achieved by Facebook at its flotation two years ago. The firm also looks to raise above $20 billion with this placement, which would make it one of the biggest IPOs in history.
That makes this a colossal deal, but market observers were surprised by the humility evident in the offering—not the hubris. Such is the excitement among investors worldwide for Alibaba’s shares that some expected its shares to be even pricier. Pundits had predicted a valuation of $200 billion or more for the firm. Some wild-eyed enthusiasts have even claimed that this is a
hyper-growth firm that could one day be worth a trillion dollars.
So what explains the decision to price the IPO thus? One reason the firm’s management has taken a conservative tack is the desire to avoid the sort of mess that followed Facebook’s flotation, which saw the American firm’s shares plunge in value in the wake of the IPO. Of course, the social network’s shares have bounced back nicely since then, but this early performance is widely seen as a fiasco. Particularly given the suspicions many American investors have about Chinese stocks (understandable given the recent history of dodgy offerings by obscure firms dubbed “fraud caps”), Alibaba’s owners do not want to give investors any reason to be skittish about their company.
Another reason for their caution is the failed earlier flotation on the Hong Kong exchange of , the firm’s business-to-business division. This was the company’s first business line, but it has stagnated while the fortunes of Taobao and Tmall, respectively its gargantuan consumer-to-consumer portal and business-to-consumer site, have skyrocketed. The firm priced the earlier
flotation rather greedily, and found that there was nowhere to go but down. In the end, it decided to take the entire division private at an inflated price in order to quell shareholder unrest.
So how much is Alibaba really worth? There are good reasons to hop onto the magic carpet. The firm utterly dominates Chinese e-commerce on both personal computers and mobile devices. This is hugely profitable because China is both the world’s biggest e-commerce market and also its biggest market for smartphones. Thanks to its first-mover advantage and enormous scale, the firm is also well positioned to benefit from the rise of the country’s middle classes.
But that does not mean Alibaba is a good share at any price. The firm’s cosy, near-monopoly position atop China’s e-commerce markets is now being challenged vigorously by a number of rivals. JD, a local rival which has just completed its own successful IPO in America, is coming after Alibaba aggressively with an “asset-heavy” e-commerce business model akin to Amazon’s—a stark contrast with Alibaba’s emphasis on maintaing “ass et-light” platforms like Taobao that leave warehousing, inventory management and so on to others. Baidu and Tencent, well-funded local internet rivals, are now also targetting e-commerce with inventive offerings.
So the journey looks to be a wild ride—but if Mr Ma gets his way, at least it will not be a short one. In his investor letter, he makes this promise: “Since our founding in 1999, we have helped millions of small businesses to achieve a brighter future, and we hope to do this for at least 102 years.”。