Vindu Goel, Michael J. De la Merced and Neil Gough, whose original article has a different title
The e-commerce behemoth Alibaba filed in the United States on Tuesday to sell stock to the public for the first time, in an embrace of the global capital markets that represents a coming of age for the booming Chinese Internet industry. It is expected to raised 1 billion dollars immediately and may be 15 billion eventually-making it the biggest American IPO since Facebook raised $$16 billion. “Alibaba is the fastest-growing Internet company in one of the fastest-growing economies in the world,” said Sameet Sinha, an analyst with B. Riley & Company, a boutique investment bank in Los Angeles. “They are like an Amazon, an eBay, and a PayPal.”
When it makes its debut on either the New York Stock Exchange or the Nasdaq market, Alibaba is also expected to have a share price that could value the company at roughly $200 billion — more than the market value of Facebook, Amazon.com or eBay, although still trailing that of Google or Apple.
Many investors may see Alibaba as their best chance yet to buy into China’s enormous growth. Yet the offering will also shine a bright light on a company that is relatively unknown in the West. It has allegedly woven a complex web of businesses and dealings that may put off potential shareholders.
Household names in China; In China, Alibaba’s brands are household names. It operates an online shopping center, Tmall, where global companies like Walt Disney, Apple, L’Oréal, Nike and Procter & Gamble have set up virtual storefronts to sell products directly to Chinese shoppers. Another of its sites, Taobao, is aimed largely at small Chinese firms that want to sell items to Chinese consumers.
The company’s digital payment affiliate, Alipay, not only handles transactions on its sites, but is also widely used as a mobile payment system on cellphones in China, much as credit cards are used in other countries. It handled $519 billion worth of payments last year. Last year, the value of all merchandise sold on Alibaba exceeded $248 billion, more than the volume on eBay and Amazon combined. Nearly 20 percent of those purchases were made through mobile phones in the last three months of last year.
American companies like Google and eBay can only dream of making the kind of profit margin that Alibaba enjoys. Last year, Alibaba had net income of $3.56 billion on revenue of $7.95 billion. That translates into a profit margin of roughly 45 percent. In comparison, eBay mustered a 17.8 percent margin. (Alibaba reports its annual results slightly differently, since its fiscal year ends March 31; by that measure, the company said it earned $1.35 billion on earnings of $4.69 billion in its most recent full fiscal year.)
Alibaba has much higher profit margins than American Internet companies, analysts say, because its costs are low. It doesn’t own the merchandise sold on its sites, making money instead from the merchants that pay a commission for access or buy ads to promote themselves. Alibaba also pays very little in taxes.
Wall Street has been eagerly awaiting an I.P.O., wanting to share in the company’s stupendous growth. Alibaba reigns as one of China’s top three Internet players, along with the search engine company Baidu and the media and gaming conglomerate Tencent, but is bigger and more profitable than those rivals.
Some investors have resorted to indirect routes to get a piece of Alibaba, like buying stock in Yahoo and Japan’s Softbank, which both hold major stakes in the Chinese company. When Yahoo first bought a 40 percent stake in 2005, it valued Alibaba at just $2.5 billion. Six years later, when a consortium of investors took another stake in Alibaba, they did so at a valuation of about $32 billion. Now, analysts estimate that Alibaba may be worth anywhere between $130 billion and $235 billion.
And it’s not just the big money of Wall Street that is looking to participate. The immense size of the offering means that Alibaba shares will probably find a home in a broad swath of mutual funds and pension funds — and thus indirectly in the portfolios of small investors around the world.
Shares aren’t expected to begin publicly trading for several months, as the Securities and Exchange Commission reviews Alibaba’s offering materials and the company holds a roadshow to promote its prospects to institutional investors.
That time frame increases the risk that investors may be less willing to take a chance on an expensive Internet stock. Technology stocks have fallen sharply in the last few weeks after an impressive run, with some analysts saying they are overvalued. At the same time, the market’s appetite for I.P.O.’s has also cooled.
Alibaba amassed its multi-billion-dollar fortune a little at a time, shrewdly capitalizing on two trends — the rise of the Internet and China’s growing prosperity. In its prospectus, Alibaba emphasized that it planned to concentrate on the Chinese market, one whose potential it believes hasn’t been fully tapped. It cited statistics showing that only about 45.8 percent of the country’s population used the Internet, significantly lower than in the United States and Japan. And only about 49 percent of customers in the country shopped online.
SoftBank, the Japanese telecommunications giant, is Alibaba’s biggest investor with a 34.4 percent stake. Yahoo is next, with 22.6 per cent. Jack Ma, Alibaba’s founder, is the biggest individual shareholder, owning 8.9 percent of the stock; he is followed by his longtime lieutenant, Joseph C. Tsai, who owns 3.6 percent.
A significant portion of the prospectus was devoted to explaining Alibaba’s “partnership” — a group of 28 individuals that is meant to effectively keep control of the company within a small group. Alibaba has argued that the structure, which prevented it from listing on the Hong Kong Stock Exchange, is more effective than a dual-class stock structure found in number of Internet companies like Google and Facebook, in which some shares hold much more voting power than others.
According to the offering document, new partners are added every year. The group has the exclusive right to nominate a majority of the company’s directors. So far, the company has four directors: Mr. Ma; Mr. Tsai; Masayoshi Son, the chief executive of SoftBank; and Jacqueline D. Reses, Yahoo’s chief development officer. Ms. Reses is expected to resign from the board before Alibaba begins trading on a public market. In all, the Chinese company is expected to have nine directors.
Yahoo, which currently owns about 22.6 per cent of Alibaba on a fully diluted basis, is set to sell 208 million shares in the offering, leaving it with a roughly 13.6 per cent stake. Other big shareholders, like SoftBank, the American private equity firm Silver Lake Partners and the Russian entrepreneur Yuri Milner, are considered unlikely to sell significant portions of their holdings.
The company was set up in 1999 by Mr. Ma, then a 34-year-old former English teacher, and 17 others who worked out of Mr. Ma’s modest apartment in the eastern city of Hangzhou. Visitors to Alibaba’s headquarters at the time recall being able to estimate the number of staff by counting the toothbrushes jammed into mugs in Mr. Ma’s bathroom.
The company’s first venture was Alibaba.com, a site designed to connect foreign buyers with Chinese manufacturers. The site was introduced just months before China joined the World Trade Organization, and it would eventually become a beneficiary and contributor to the explosive growth in Chinese exports in the years that followed.
In 2003, Alibaba opened its second main business, Taobao.com, a retail site where individuals and small businesses can buy and sell goods throughout greater China. It was a direct play on Chinese consumption that arrived just as a substantial middle class was emerging in the country’s wealthy coastal metropolises.
Unlike its direct competitor at the time, Eachnet, a unit of eBay, Taobao charged nothing for product listings, relying on advertising to make money. It quickly gained market share and effectively forced eBay out of the market.
In 2008, Alibaba doubled down on its bet on the Chinese consumer with Tmall.com, a retail site where both local and international brands could set up virtual stores to market products directly to Chinese shoppers. With Tmall, Alibaba takes a cut of the transaction value, tying its profit directly to retail sales volumes.
Alibaba is by far the leader in the Chinese e-commerce market, which handled transactions worth 9.9 trillion renminbi, or $1.6 trillion, last year, according to iResearch Consulting Group, a Chinese consulting firm that studies the industry.
The company’s growth hasn’t been without setbacks. Claims of fraud and poor quality products have dogged its various sites, and its partnership with Yahoo has been rocky at times. Its instant messaging service, Laiwang, has struggled to gain ground against the WeChat service from Tencent, a powerhouse on mobile phones.
Still, Alibaba keeps entering new businesses, from mobile phone service and banking to cloud computing and logistics. “It’s becoming a conglomerate,” said Mr. Sinha, the American analyst. “It is going into all aspects of the Internet.” Although the company plans to remain focused on its home market for the foreseeable future, it has global ambitions as well.
Alibaba already does significant business in Russia and Brazil, and it has purchased big stakes in American companies like ShopRunner, a delivery service for scores of major retailers, and Tango, a mobile messaging service. It is building a new eBay-type retail site, 11Main, that will offer goods to consumers in the United States from a range of handpicked sellers. But that site isn’t expected to represent Alibaba’s big push into this country.
Recently, it reached out to American cherry farmers and New Zealand seafood producers to help them sell fresh fruit and live shellfish to individual Chinese consumers through Tmall. The offering is being led by six banks: Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Morgan Stanley andCitigroup.