What you need to know about the Alibaba IPO

Alibaba has targeted 19 September as a start date for its much-anticipated US float.

Alibaba CEO Jack Ma
Source: Bloomberg

Will Alibaba’s looming IPO set a new benchmark for US markets as the largest amount raised from an initial public offering? From 8 September the company will embark on a roadshow around the US, drumming up awareness of and interest in the company within the investment community. The shares are expected to be priced between $60-66. Should this prove successful, the company will look to confirm the IPO price on 18 September with trading to start the following day. The IPO could raise as much as $24.3 billion, which would value the company at $163 billion. This would see the Chinese firm join the S&P 500, jumping in at the top of the index as one of the largest 25 companies.

It should be no surprise that a company based in China is looking to set fresh records in the US, given that the current title is held by the Agricultural Bank of China, which raised $22.1 billion in 2010.

The last set of figures Alibaba released showed it had almost doubled its revenue, and nearly tripled its income to $1.99 billion. With the charismatic Jack Ma heading up the company, it has a passionate leader who wholeheartedly believes in the story he is telling. To many, this will appear to be an excellent entry point into the Asian markets and the undoubted potential the expanding consumer market offers.

Alibaba’s relationship with Yahoo

There are, however, a few issues that the markets will turn their attention to sooner or later. The relationship between Yahoo (who hold a 24% stake in the company) and Mr Ma has not always been ideal. Mr Ma has overseen a number of company changes which have seen parts of the business move under another umbrella. This was done without prior consultation with Yahoo, and has caused more than a little friction between the two companies. There is also growing concern as to what direction the company is taking. It has previously been easy to label Alibaba as a ‘Chinese version of Amazon’ but, considering the wide array of companies that now come under the Alibaba brand, that is far too simplistic a description. Since the beginning of 2012, Mr Ma has overseen 29 acquisitions for a total outlay of $16 billion.

Where do Alibaba’s profits come from?

Because of the complicated structure of this company, questions are now being asked about where its profits are derived from. Are they from the ongoing profitability of the core business? Or are they coming from the acquisition of so many profitable businesses? Time – and more demanding reporting requirements due to being quoted on the S&P 500 – should give us those answers, but Alibaba’s management will find US investors a lot less tolerant than their Chinese counterparts if they are not forthcoming

Lack of enthusiasm from US

For an IPO that has been very hyped-up by the investment community, retail investors in the US have not been particularly enthusiastic about Alibaba’s debut. This is a problem affecting the stock market generally – many investors, scared by two huge falls in equity markets since 2000, have opted to keep their money elsewhere. Given that Alibaba’s offering has shades of the pre-2000 dot-com boom about it, many will be cautious.

Reports from asset managers in the US have indicated that the number of clients enquiring about Alibaba is around a quarter of that for Facebook. As an actual business, Alibaba seems to have more in its favour than the iconic social network, but it will need to fight hard to get its message across.

The growth of China

Alibaba’s move into the US makes sense from a long-term perspective. Growth in China has been meteoric but now most of those businesses that want an Alibaba listing have achieved one, with only new startups seeking to join, while its network is easily replicated since its brand and software are not particularly unique.

Chinese companies have not found it easy to move from their home markets into overseas markets. Alibaba faces similar challenges, especially against Amazon and eBay, and it will be the company’s performance in its first year that will be a key determinant for investor sentiment post-IPO.

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