The Chinese company Alibaba is going public at 9:30 AM ET on Friday. It is poised to be the largest IPO in history, expected to raise $21 billion. According to Fortune, the offering price will be in the range of $60 to $68 per share.
Unless you've spent the last several months eagerly waiting for this IPO, or have spent any time in China, it is possible you may not be familiar with Alibaba, or the implications of it going public.
Alibaba is China's largest e-commerce company. (A primer on the company can be found here.) According to CNBC, it is used in 80 percent of all Chinese online commerce. The 15-year-old company is a combination of Amazon and eBay, along with some of the functions of Google, but it also has other components, including a PayPal-like system called Alipay. According to Pando Daily, it has also recently backed an Uber competitor.
Not only will this IPO make founder Jack Ma an exceedingly wealthy man; it also introduces the brand to the American public, establishes a level of credibility and sets an interesting precedent for future tech IPOs, some of which are waiting in the wings.
Past tech-related IPOs have been fair or underwhelming -- as was the case in April of this year with China's Twitter-like social media site Weibo. American social media companies Facebook and Twitter were also categorized as having "troubled" or "failed" IPOs. (Although in the case of Twitter that description is more controversial.) So what does this mean for Alibaba?
There are some reasons to be optimistic, yet also a few lingering concerns, which will all come to a head at the opening bell. Salon spoke to Professor Anthea Yan Zhang, a professor of Strategic Management at Rice University's Jesse H. Jones Graduate School of Business to gain some insight on the upcoming IPO.
Professor Zhang's areas of expertise include include, but are not limited to, international strategic alliances and technology entrepreneurship in emerging markets and foreign direct investment. Her research has been published in the Academy of Management Journal, Strategic Management Journal, and Journal of International Business Studies.
The interview has been edited and condensed for clarity.
For a reader who isn't familiar with the financial terms, could you explain exactly what's going to happen on Friday, and what it means?
So as you mentioned, Alibaba is going to be the largest, or one of the largest IPOs in history. It's even bigger than a few years ago another IPO from China, which is called Agricultural Bank of China. So this will be one of the largest ones. As you mentioned Alibaba is a well-known brand in China. It has a big business in China. And unlike many IT/e-commerce companies, Alibaba is actually very profitable. That is very different.
In China, Alibaba has two major websites, one is called Taobao, which is for consumers-to-consumers [transactions]. The other is Tmall, is for business [to sell to] consumers. So those two websites generate huge web traffic, and also bring in tremendous profit to Alibaba. In recent years Alibaba got into other business -- for example online pay [with] Alipay -- and also it got into the wealth management business. So if you look at Alibaba as a business model, it is really a combination of EBay, Amazon and also takes some function – product search function – of Google. It's a very large business; it's a very complex business, and is a profitable business. It's a growing business. All these reasons contribute to the fact that Alibaba is going to be one of the largest IPOs in history.
There was an article recently in the AP headlined, "Alibaba Investors Beware, History is Not On Your Side." It brought up that there's not a great history of Chinese companies and IPOs in the U.S. Do you think that this is going change? Especially when tech IPOs don't have a sterling track record, how will this be different?
I think Alibaba is different from other companies. One reason is that Alibaba is profitable, which is different from other tech IPOs. So its valuation is based upon real earnings and real profits, in place of pure speculation. So I think that's very different.
I also think currently – at least in China – Alibaba is the number one. Much larger than any other competitors. I think in this winner-takes-all business, since Alibaba already built its scale and dominance in Chinese markets, it's really just hard for competitors to catch up. Let it be Chinese competitors of foreign competitors like EBay or Amazon, it's really hard for them to catch up to the dominance enjoyed by Alibaba. At least in the Chinese market.
I think if we talk about concerns with Alibaba, I would say there are a couple concerns. One is a governance issue of Alibaba. Because with Alibaba's IPO it adopts a partnership-ownership structure is basically two classes of sharers. Even though Jack Ma, the founder of Alibaba and his team, only owns a small proportion of shares, they pretty much control the decision making in Alibaba. So external investors would have very limited influence on Alibaba's decision making. So that is a number one concern.
Number two concern is that Alibaba is number one in China, and has plans to expand in overseas, but to what extent Alibaba's successful history can be carted to overseas markets is a big question mark.
Why is the partnership share structure a concern?
With this two-classes share structure, Jack Ma and his team, the so-called "partners," control the nomination of the board of directors. Thus external investors will have little say on Alibaba's governance and business. That is why this is a concern.
Do you have any thoughts of what expansion or the IPO means for Amazon or eBay?
I don't think that Alibaba will be an immediate threat to either eBay or Amazon, in the United States. Of course they compete in China, and Alibaba is winning the competition in China -- no doubt about it. When we talk about the U.S. e-commerce market, I don't think Alibaba would have immediate threat to eBay or Amazon in the U.S.
First of all, as you mention, Alibaba, even though it is well-known in China, average individual consumers in the U.S. don't recognize that name. People are already used to the shopping malls or delivery modes of Amazon and eBay, so it would be hard and costly for Alibaba to change the consumer behaviors from eBay and Amazon to Alibaba website. So that's number one.
Second, it takes time to build a supporting infrastructure. Amazon, in particular, has been very aggressive in building highly efficient, high-scale warehouses, and it has also been investing in delivery. Those kinds of infrastructures are very important to the market dominance, and also the efficiency of e-commerce. It would take a long time for Alibaba to catch up, and build those infrastructures in the U.S. So, from both the perspective of brand recognition, consumer shopping habits and also the development of infrastructure it will take a long time for Alibaba to penetrate the U.S. market.
Do you think that will have any effect on the company going public? Because I imagine that in tech and financial world, because they know the name Alibaba, and they're probably pretty excited about the IPO, but do you think that for a smaller/individual who might want to buy stock, do you think the lack of recognition or infrastructure is going to affect that or affect share prices?
It is very likely that the first day, or the first few days, the stock will do very well. But in the long term, how the stock will do is really hard to predict. I think its IPO is still relevant to average investors for two reasons. Alibaba and its advisors are really doing a great job in PR – introducing this brand to investors and institutional investors. That generates a lot of interest.
Second, I think that from the investors perspective, if they want to buy Alibaba shares they want to buy into the Chinese economy. So the fact that Alibaba is doing so well – is dominating the e-commerce market in China – is probably good enough to many investors in the short term.
But in the long term, on one hand, I have concerns on how successful Alibaba can replicate its success in Chinese markets, and overseas markets. I do have my doubts on that issue. But the capital raised in the IPO will help them to penetrate and expand the overseas market, and equally important the credibility that they get from listing on New York Stock Exchange is also very important from a foreign consumer's perspective when you think about a Chinese company we don't know much about it. They may have their doubts. But now Alibaba is listed in the New York Stock Exchange and subject to various regulation of the U.S. government that will bring credibility to Alibaba in global markets. That will reduce the concerns of foreign host countries. So with it comes the financial resources and credibility. So listing in New York Stock Exchange is very crucial to Alibaba's global space.
Are there other reasons why Alibaba would list on the New York Stock Exchange?
Another point, in addition to the capital they have raised – for example in Shanghai Stock Exchange – it is hard to say that you are going to raise the equal amount of money compared to what you can raise in New York Stock Exchange. And in addition to finance, capital generated, the credibility.
I also want to highlight another point, Alibaba actually originally considered listing in Hong Kong's stock exchange. But because the founder Jack Ma and his team want to have a partnership structure that we talked about at the beginning, however Hong Kong stock exchange does not allow that. Meanwhile U.S. capital markets are some of the most flexible, Facebook already has these two kinds of shares. So listing at the New York Stock Exchange would allow Jack Ma and his team to control the company even though they only own a small percentage of the shares. That is also a very important reason for their choice of New York Stock Exchange.
You mentioned earlier that Alibaba's success is tied to the Chinese economy, and there has been speculation about whether or not the Chinese economy can maintain its huge rate of growth. Do you think that could throw a wrench in its plans?
Actually, I'm not concerned about that. If you look at China's growth in the past decade, the government invests in capital investments – in those big projects. So that might decline over time as China's economy shifts from more investment driven to more consumption driven. But if you look at the business model of Alibaba, it is really focusing on consumers – individual consumers – and the businesses that serve individual consumers. So that why I think Alibaba's not as closely linked to the government investment in big projects.
So you relate it to the income groups and those individual customers. And also you can look at major cities in China. The real estate is rising sky high, that increases the rent for the physical stores, eventually will reflect in prices, right? So that will have to drive consumers to shop online, which I think will help Alibaba with growth.
I'm really interested in what Alibaba’s IPO might mean for the future of tech IPOs – tech companies or online-based companies. Do you think that this is going to push more companies to be consumer based? Facebook and Twitter adding buy buttons. Do you think that having concrete profits will affect how tech IPOs go in the future?
Well that's certainly a good point. That is a valid point, I kind of agree. Because in the early years tech IPOs and investors did not care about profits. They really cared about the growth and profits. Well maybe the success of Alibaba's IPO will bring real profitability back into the picture. That is really possible. Alibaba – they had a company list in Hong Kong stock exchange, which is called Alibaba.com. The business is now for the whole group on IPO, so as a whole group it has waited longer before the IPO. We have also observed that in the U.S. tech companies founders or the initial institutional investors no longer rush to IPO they want to be profitable before the IPO. In return investors may expect actual profit for those relatively older technology companies.
Yahoo was an original investor, how will this affect them?
Yahoo already sold half of its shares in Alibaba, and it has the choice of selling additional shares after the IPO.
What would make Yahoo more profitable?
It has been a great investment; it has been a great financial return for Yahoo. But on the downside sold its Chinese business, Yahoo China, to Alibaba, so as a result you can see it is a tradeoff. It'll get a big financial return for its investment in Alibaba, but it kind of also gave up its option of penetrating the Chinese market itself. In terms of what they should do with the money they got from Alibaba's IPO, I really think it depends on opportunistic costs.
Right now, Yahoo knows that it is not doing really well. The new CEO, she needs capital to invest in new growth engines, and a lot of cases need to build those engines by acquiring other companies -- smaller ones. To do that, it will need money. So probably, Yahoo will cash out in its investments in Alibaba and use the money to invest in other areas that are closer to its core business.