Alibaba’s IPO matters even more than you thought
It could very well be the biggest stock-market debut in history. The long-awaited Alibaba initial public offering will take place this month, which will put the Chinese ecommerce giant on a par with Amazon overnight and make it one of the largest listed firms in the U.S.
Here’s why it’s important - even if you are not directly invested.
Firstly, Alibaba’s IPO likely marks just the beginning of its international acceleration. Although a number of Chinese online firms like VIPShop and Baidu are publicly listed in the U.S. and still focus on business in China, Alibaba will probably seek to expand its reach. Its recent partnership with the Singapore Post certainly hints at this. Not only will marketing beyond China’s borders allow it to grow its operations, but it will also enable the firm to acquire new technologies and remain competitive both in the Chinese market and abroad.
Alibaba’s Chairman, Jack Ma, is ambitious, and it isn’t beyond the scope of possibility that he may look to purchase the likes of Ebay or Paypal. The company’s growth could impact negatively on market rivals. Although it is new to the global markets, it boasts a formidable current business model. While Amazon merely broke even in the second quarter, Alibaba generated 43% profit margins.
Secondly, Alibaba is not a lone operator in the world of tech stocks: Yahoo owns a 22.5% stake in the firm. Despite their display ads generating poor revenues, Yahoo’s stock price has jumped 28% in the last year largely thanks to investors’ desire for a piece of the Alibaba puzzle. Yahoo has stated that it will keep around half of its shares, with the hope that they will appreciate, and will sell the other half. It will appease shareholders by paying them about half of the cash raised, post-taxes, as dividends, and presumably will strategically use the rest of the generated funds. Following the purchase of Tumblr for $1.1 bln last year, analysts speculate that CEO Mayer may be planning further acquisitions in the mobile or social space to enable the firm to compete more effectively against its online rivals.
There’s a third and significant reason why this IPO is a game changer. After much conjecture, Alibaba revealed on Friday that the price per share will be around $60 to $66, establishing the company’s value at approximately $155 bln. That matches the lower end of analysts’ estimates of the company’s value. Alibaba seems to be looking to entice longterm investors but may very well raise the price of shares at a later date. This is a lesson learnt from Facebook’s IPO where the aggressive pricing proved to be a miscalculation. Stock price dropped after floating and took a good year to recover. If this IPO proves successful and Alibaba achieves the correct balance between raising funds and keeping its shareholders happy, it will set a strategic precedent.
Most significantly of all, when ‘BABA’ shares begin trading on the New York Stock Exchange, not only stock traders will be watching. Alibaba is dominating headlines not simply because of the estimated value, but because investors, businesses and politicians see this huge IPO as a reflection of China’s superpower status and increasing engagement with the global financial and corporate world. This could open the way for greater cooperation and further deals between China and America. And that, my friends, would make history.