It was the deal they all wanted, but in the end it was New York who snatched the $15 billion prize.
The newly crowned largest financial centre in the world has good reason to celebrate; this is the biggest IPO since Facebook, after all, and the Company’s appearance on the scene in the West is a potential game changer; but if you scratch under the surface, there are elements to the deal which may not be to everyone’s liking.
It’s an open secret that Ali Baba’s management would rather have listed in Hong Kong, but after 2 years of wrangling with regulators they couldn’t get the deal done. Why? It all boils down to the Company’s complex governance structure;
The Company has a unique corporate structure which allows its partners to choose who sits on the board, placing control of the Company firmly in the hands of the likes of Jack Ma, the former English teacher who founded the Company, Joe Tsai, the Alibaba Group Holding executive, Michael Yao, the ex-Rothschild’s banker and senior vice-president, and a handful of other senior executives.
The Hong Kong stock exchange, however, does not permit such an arrangement, and has stuck firmly to its principles; in order to protect retail investor interests, it insists, listing Companies must agree to a one share one vote policy.
Undeterred at first, and confident that the Hong Kong stock exchange, which has not raised more than $4 billion via an IPO since 2010, and has been trying to diversify away from China dominated financial and property companies, would eventually see sense and permit the listing, Alibaba were prepared to come to the negotiating table.
Initially, the Company hoped that a public consultation would help to implement a change to the current listing rules, but the consultation lacked the necessary sense of urgency, and when the Securities and Futures commission refused to accept the Stock Exchange’s proposed changes, requesting amendments of their own, Alibaba execs finally lost patience.
Were they right to feel aggrieved that a deal could not be reached? After all, Hong Kong was the Chinese government’s favoured destination for the listing, and has traditionally been associated with the kind of tycoon style, executive-led business model that Alibaba wished to implement. Then there are the lost fees, estimated at $300m for advisory alone, plus a commission fee of nearly 2%
The upside is reputational; Hong Kong’s integrity as a financial centre remains unblemished, which may help attract future flotations, but if the biggest businesses, and with an estimated $141 billion market value, Alibaba is the biggest kid on the block right now, don’t want to play ball, then Hong Kong may find itself falling even further behind the curve.
UK Prime Minister David Cameron had been canvassing aggressively on behalf of the LSE and will be mortified to have lost out to New York, as the scramble to list Chinese tech companies gathers pace.
Weibo, the Chinese version of Twitter, is expected to list on NYSE, raising $500m in the process, and retailing giant JD.com has also filed for a listing.
In the business world, 2 key and related principles have always held sway; success breeds success, and money always goes to money. By picking up the Alibaba IPO, the NYSE has started a trend that will see an influx of investment the likes of which we may not have ever seen before.
But as I said at the beginning of this piece, this listing is categorically not a risk free endeavour. Remember, Facebook shares fell by more than half after it listed, and although the share price has now recovered, Facebook is the Californian Company that the American Public already knew and loved, and the same principle applied to Twitter. Alibaba must overcome doubts about its security, business model, payment structures and merchandise. Will Alibaba’s accountancy practices stand up to the scrutiny of Citigroup, Credit Suisse, Goldman Sachs and the other investment banking firms queuing up to take on its Corporate Finance work?
Alibaba has backers in the West, most notably Yahoo, which holds a 24% stake in the Company, and also in Japan, a country that successfully markets its products in the US, via Softbank, which owns 37%. There is little doubt, however, that Alibaba will take time to catch on in the West, if it catches on at all.
The NYSE got the deal because of its light touch, no questions asked approach to listing.
Will Alibaba send his forty thieves to the US? Or is this more than just a magic carpet ride?