Alibaba Ipo Analysis

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THE ALIBABA IPO        

I. Introduction and company overview[pic 4][pic 5]

On September 19, 2014, Alibaba came up with the largest IPO ever, raising US$25bn.

Aliba        ba is China’s largest e-commerce company, with more than 80% market share in China’s online and mobile e-commerce market in 2014. It is also the largest e-commerce company in the world in terms of Gross Merchandise Volume (GMV). [pic 6]

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Key financial facts[pic 9]

• 03/1999: Alibaba is founded with a collective fund of US$60,000.
• 01/2000: Softbank invests US$20 million in Alibaba.
• 10/2007: Alibaba.com goes public and is listed on the Hong Kong SE, raising US$1.5bn.
• End of 2008: Alibaba.com is hit by the global slump in stock markets and loses US$20bn of market capitalization.
• 2011: Alibaba.com is hit hard by a corporate scandal that drags down the stock price drastically.
• 06/2012: Alibaba buys back the shares of Alibaba.com and delists it from the HKEx.

II. Reasons for the IPO[pic 10]

1. Theoretical reasons

Many companies decide to go public to raise cash. The raised cash can be used to build facilities, fund important business acquisitions, R&D or pay off the existing debt (decrease the company’s leverage level giving it a more solid standing when negotiating interest rates with banks).

The many compliance issues and international regulations the company has to respect when going public raise the credibility of the company and proves its corporate stability.

Also, through the IPO, the company benefits from publicity that makes the company’s products known to new potential clients. This increased public awareness and visibility may lead to an increase in market share for the company.

An IPO may be an exit strategy for actual shareholders but it is also a way to spread the risk of ownership among a large group of shareholders.

The company can use its listed shares as currency to buy other companies (currency for M&A and employee incentives). The value of public stocks is known.

2. Specific reasons

According to the F-1 document, Alibaba declares “we plan to use the net proceeds from this offering for general corporate purposes” (P17), but we assume Jack Ma has other reasons for going public. Here is a shortlist of what we thought were the most relevant reasons for Alibaba’s IPO:

• Reducing financial debt. Financial debt has been constantly increasing since 2012 and a $7.1bn share buyback to Yahoo, partly financed by debt ($2bn). By the end of 1H2014, Alibaba’s gross financial debt was $10.1bn.
• Financing Alibaba’s internal development. It’s the reason that is the closest related to “general corporate purposes”. Expanding quite rapidly in China and in the US, Alibaba has major improvements to finance, such as mobile monetization, which remains quite low (1.5% in 2014 whereas Mobile GMV is skyrocketing), or logistics hubs, that allow high delivery rates within Alibaba’s markets.
• Financing strategic acquisitions. Alibaba, as its main competitors did, need to diversify (e.g. Amazon in cloud or VoD). The fastest way to do it is to use a takeover strategy. That’s what Alibaba did with Youku Tudou for $4.2bn. The group might be tempted to do acquisitions in the US, to develop its activities on the American market.
• Brand recognition. Going public might be helpful to improve Alibaba’s image, mostly outside China, particularly since the group realized the biggest IPO ever, with more than $25bn and no less than 35 underwriters. That is also why Alibaba chose to be listed in the US, among its main global competitors such as Amazon or EBay.

III. Characteristics of the IPO [pic 11]

US Securities laws prevent foreign corporations that have shares trading in a foreign market to directly list their shares on U.S. stock exchanges. To list its shares, Alibaba offered around 320 million American depositary shares (ADS), directly corresponding to its 320 million ordinary shares, with a par value of US$0.000025 per share. These 320 million ADSs included 61,5% held by various shareholders including Yahoo and Jack Ma, and 38,5% held by Alibaba Group. Alibaba set the offer price at US$68 per ADS, representing an offer worth US$21,77bn. Alibaba and certain of the shareholders have also granted the underwriters a 30-day option to purchase up to an additional 48 million ADSs at the same offer price.

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