With Alibaba’s upcoming IPO set to dominate headlines in the financial media over the next few weeks, CKGSB Professor of Finance and Chair of Finance Department Henry Cao’s analysis is featured in this Forbes interview with BRICS correspondent Kenneth Rapoza. Professor Cao talks about the company’s two-tiered structure, as well as why the firm is choosing to list in the US rather than in Hong Kong.
Alibaba, the world’s largest e-commerce company, will go on an investor road show in September to sell its story to potential shareholders. The Chinese firm will undoubtedly become the largest initial public offering ever on the NYSE. And Jack Ma, the company’s billionaire founder, will have no problem finding interested parties.
But, Ma has a lot of explaining to do. The company has a two-tiered shareholder structure that Hong Kong refused and New York did not. Investors will want to learn a bit more about that, and how it plans to handle the competition.
Alibaba is reportedly going to start booking shares to investors as early as Sept. 3, with management traveling across Asia, Europe and the United States before the IPO, scheduled tentatively for Sept. 16.
Ma will first meet with potential investors in Hong Kong and Singapore then head to London and New York, according to China Daily, citing sources within the underwriter group. The roadshow stops in Boston; Kansas City, Missouri; Denver; Chicago; Los Angeles and San Francisco. Alibaba’s $20 billion IPO would be bigger than Visa’s $19.65 billion offering in 2008, the largest in U.S. history.
The Chinese e-commerce company may set its IPO value at $154 billion, or 22% below analyst valuations, according to average estimate of five analysts surveyed by Bloomberg last month. The same analysts gave Alibaba an average post-listing valuation of $198 billion, according to Bloomberg.
Alibaba was originally going to list in Hong Kong, but chose the U.S. because Hong Kong would not allow the two-tiered shareholder structure.
“Ma wants to have a two-tiered structure so the shares sold to international investors will not have voting control,” said Henry Cao, finance professor at Cheung Kong Graduate School of Business, the same school where Ma got his MBA. ”No one is going to be able to buy 51% of the shares and then replace Jack Ma,” Cao said. Steve Jobs, Apple’s famous CEO and founder, was ousted by shareholders in the 1980s.
Hong Kong refused the structure proposed by Ma because regulators were worried about investors rights. The NYSE and Securities & Exchange Commission also worry about investors rights, but the U.S. has more lawyers to keep management in line.
“The legal system is more efficient and independent in the U.S.. In Hong Kong, regulators were worried that Jack Ma would have all these connections to the Chinese government and if something happened where he went out of favor with them, he’d be in trouble,” said Cao.
But keeping secrets will be harder in the U.S., which is more transparent than Hong Kong. Investors will know what they are buying, or the real money — institutional investors — will not buy it.
At least in theory.
There has been a lot of discussion about Alibaba’s two-tier structure and part of this road show will seek to do away with investor unease on the matter. This is the first Chinese company to have this type of structure on the NYSE.
It’s not that the NYSE thinks Jack Ma can do no wrong. The people behind the NYSE know one thing for sure: Alibaba is second only to Walmart in terms of revenue. This listing is very good business.
The underwriters, led by Goldman Sachs, make 7% of the $20 billion expected in the IPO. Alibaba itself is worth around $160 billion.
But on the road show, investors will not be as kind as the NYSE. They will question Alibaba’s past, where it has run afoul of large shareholders. Ma had a financial arm of Alibaba. Yahoo! and Soft Bank of Japan owned a part of it. And Alibaba spun it off without telling them.
Meanwhile, for day traders who might not be able to buy into the IPO until it’s already opened and gained double digits, Cao thinks that Tencent Holdings will be a nice side-bet to Alibaba. It will be Ma’s biggest competition in Asia.
“Over the last few years, Alibaba’s quarterly growth rate has been at least 30% but that is not sustainable,” Cao said. “I am sure Alibaba’s IPO will do very well. The market is very hyped about this stock.”
This article originally appeared here.
