“Alibaba Group Holding Ltd. unveiled plans for an initial public offering that values the company at $155 billion, which would instantly make it one of the largest listed in the U.S. and mark one of the biggest stock-market debuts ever.”
What is Alibaba?
With recent news of the upcoming Alibaba IPO, a lot of people are in the dark on what exactly Alibaba is or what it does. Well, Alibaba is similar to Amazon, but with more!
Alibaba Group Holding Ltd., or Alibaba, is China’s largest e-commerce company. Alibaba securely rose to the top as the biggest e-commerce company in China due to its network of “interconnected products and services.” Alibaba is a collection of various online marketplaces for consumers and businesses that makes its money primarily by charging advertising fees to merchants looking to promote themselves in online markets that have 279 million active buyers and 8.5 million active sellers.
In other words, Alibaba is China’s, if not the world’s, largest online global marketplace with its own search engine and bank all in one.
Biggest IPO by Market Value of All Time
After months of speculation about the size of Alibaba Group Holding Ltd.’s initial public offering, the world got its first official clue on Friday. The Chinese e-commerce giant is poised to be the “largest initial public offering ever measured by amount raised and market capitalization.” Alibaba set the price range for its IPO at $60 to $66 a share, valuing the company at about $155 billion at the midpoint of the range. That would make Alibaba the biggest IPO in terms of valuation, according to data provider Dealogic, exceeding the likes of Visa Inc., General Motors Co., Facebook Inc. as well as several Chinese-listed companies.
The $155 billion market valuation is just shy of Amazon.com Inc.’s current valuation. The online retail giant has a market cap of about $160 billion, according to FactSet.
In a regulatory filing Friday, Alibaba said it expects to offer 320.1 million American depositary shares. Including the extra shares set aside for underwriters, the offering could raise up to $24.3 billion, which would be the biggest IPO ever.
The $155 billion valuation puts Alibaba ahead of Agricultural Bank of China, which had a $133 billion market value when it debuted in July 2010. Facebook had an $81.2 billion when it went public in May 2012. UPS had a $60 billion market cap at the time of its debut in 1999.
Why Alibaba Matters According to the Wall Street Journal
Already, IPOs in the U.S. have raised $47 billion so far this year, according to Dealogic. Adding in Alibaba’s deal, it will be easily the best year since the dot-com era that ended in 2000, when IPOs raised more than $100 billion.
Further Breakdown
The $155 billion valuation, representing the midpoint of an initial price range of $60 to $66 a share, comes at the lower-end of analysts’ current estimates of the company’s value.
The pricing was designed to help ensure that long-term investors are enticed to buy into the massive offering, people familiar with the deal said. That said, if investors like what they see in the days ahead, the company and its bankers could raise the price, which happened with U.S. social media giants Facebook Inc. and Twitter Inc.
“The company has taken a conservative stance with its pricing, just to prevent a repeat of the Facebook IPO,” said R. J. Hottovy, an equity strategist at Morningstar. Yet he said the research firm is still comfortable with its estimate of a $220 billion value, based on the company’s future prospects, and expects it to trade closer to that level on the open market.
Alibaba’s price is “set to make the deal attractive. It’s a smart move on their part,” said Vince Rivers, a senior portfolio manager at JO Hambro Capital Management, who plans to attend the U.S. roadshow.
History
Alibaba Group was founded in 1999 in current CEO Jack Ma’s apartment with Alibaba.com.
Ma explains the history behind the name Alibaba as following, “One day I was in San Francisco in a coffee shop, and I was thinking Alibaba is a good name. And then a waitress came, and I said, “Do you know about Alibaba?” And she said yes. I said, “What do you know about Alibaba?”, and she said, “Alibaba and 40 thieves”. And I said, “Yes, this is the name!” Then I went onto the street and found 30 people and asked them, “Do you know Alibaba?” People from India, people from Germany, people from Tokyo and China … they all knew about Alibaba. Alibaba — open sesame. Alibaba is a kind, smart business person, and he helped the village. So … easy to spell, and globally known. Alibaba opens sesame for small- to medium-sized companies. We also registered the name “Alimama”, in case someone wants to marry us!”
Products & Services
“It is a marketplace, a search engine, and a bank all in one!”
As mentioned above, Alibaba does a lot more than just sell toys and clothes. Alibaba is China’s — and by some measures, the world’s —biggest online commerce company. Its three main sites — Taobao, Tmall and Alibaba.com — have hundreds of millions of users, and host millions of merchants and businesses. Alibaba handles more business than any other e-commerce company.
- Taobao — Alibaba’s biggest shopping site. It’s home to seven million merchants selling everything from tiger-striped leather jackets to origami decorations. It’s free for users, but sellers can pay for ads to stand out from the crowd.
- Tmall — similar to Taobao, is a B2C, or business-to-customer, online sales platform dedicated to official brand stores and allowing them to sell their goods across Greater China.
- Alibaba.com — on the other hand, is the primary company of Alibaba Group, and is the world’s largest online business-to-business trading platform for small businesses. In addition, Alibaba.com offers a transaction-based retail website, AliExpress.com, which allows smaller buyers to buy small quantities of goods at wholesale prices.
Counterfeits
Since Alibaba first opened online, the company has always had issues with “fakes” being sold through their markets. Many brands say Alibaba’s sites, particularly Taobao, are teemed with counterfeits. Though this could be a problem for Alibaba as it readies for its IPO, the company says it spends millions of dollars a year battling fakes, and some merchants say Taobao has gotten faster at taking down suspect listings.
Alibaba vs. Amazon
Expanding outside of China will prove difficult for the company as markets like the U.S. already have established e-commerce players such as Amazon and eBay Inc. And though the company valued itself just below it’s American rival, Amazon, Alibaba is far more profitable than many of its American Internet counterparts, generating 43% operating profit margins in the second quarter. Amazon broke even in that period—a 0% operating margin.
At $155 billion, Alibaba would be valued at a seemingly steep 41 times earnings for the fiscal year that ended in March. Yet analysts expect those earnings to keep growing quickly in future years, which would support a higher multiple. With just a sliver of net profit in 2013, Amazon is valued closer to 600 times its 2013 earnings.
Partners & Shareholders
- Yahoo Inc. is the biggest seller, according to Friday’s filing, offering 121 million shares worth about $7.6 billion in the initial deal, about a quarter of the U.S. company’s current stake. That share count could rise as high as 140 million if more shares are sold amid strong demand for the deal.
- Alibaba’s biggest shareholder, Japan’s SoftBank Corp., which will have a 32% stake after the IPO, is selling none of its shares in the offering.
- SoftBank invested $20 million in Alibaba in 2000 and will be sitting on a stake worth about $50 billion.
- China’s sovereign-wealth fund China Investment Corp. is selling about a quarter of its current 2.8% stake, while U.S. private-equity firm Silver Lake is selling less than a tenth of its 2.5% stake.
- and last but not least, the founder of Alibaba, Mr. Jack Ma, will be selling roughly $800 million of his stake, which would be worth more than $12 billion at the offering’s midpoint price. He will still own 7.8% of the company after the IPO.
Alibaba’s 30 partners, which include top executives, managers at affiliated companies, and Mr. Ma, have the power to nominate a majority of the corporate board, as a way to preserve their vision for the company and what they believe is its unique culture.
“We believe that our partnership approach has helped us to better manage our business, with the peer nature of the partnership enabling senior managers to work as a team and override bureaucracy and hierarchy,” Mr. Ma wrote in a personal letter to investors in the IPO filing this past Friday.
So What Does This Mean? (Should You Invest)
Investors will have to weigh the risks presented by Alibaba’s complex corporate structure and unusual governance, not to mention the tough competition it faces from other Chinese heavyweights like Tencent Holdings Ltd. and U.S. dominant Amazon. But despite all this, Alibaba’s IPO release will drastically change the U.S. market and anyone that can afford to buy the company’s shares will benefit. Still not convinced? Check out these ten reasons why to invest in China’s e-commerce giant.
Update (9/19)
Alibaba Group Holding ($BABA) priced their IPO at $68 a shares, raising $21.8 billion on Thursday, making it the third largest IPO ever, behind Agricultural Bank of China Ltd’s record $22.1 billion listing in 2010 and ICBC’s $22 billion IPO in 2006.
The stock opened at $92.70 at 11:53am E.T, surging about 36%. The stock eventually went to around $99 before settling back at $92.
[Tweet “Alibaba surged 36% after opening at $ 68, opening at $ 92.70.”]
Interestingly, Yahoo ($YHOO) who owns about 22.4% of Alibaba, is down 3.62% despite signaling their intentions of selling 5% of their stake at a profit. Check out USA Today’s full coverage here.
Information was taken from the Online Wall Street Journal. Interested in participating in the IPO? Get a head start and sign up on SprinkleBit.
