Why a Chinese Company Is the Biggest IPO Ever In the US

An anonymous reader writes The Chinese e-commerce giant Alibaba has made headlines lately in US financial news. At the closing of its Initial Public Offering (IPO) on Friday, it had raised $21.8 billion on the New York Stock Exchange, larger even than Visa's ($17.9 billion), Facebook's ($16 billion), and General Motors ($15.8 billion) IPOs. Some critics do say that Alibaba's share price will plummet from its current value of $93.60 in the same way that Facebook's and Twitter's plummeted dramatically after initial offerings. Before we speculate, however, we should take note of what Alibaba is exactly. Beyond the likes of Amazon and eBay, Alibaba apparently links average consumers directly to manufacturers, which is handy for an economy ripe for change. Approximately half of Alibaba's shares "were sold to 25 investment firms", and "most of the shares went to US investors."

Comments

more direct connection to producers

[Anonymous Coward]

The reason Alibaba will take over from Amazon and Ebay is simple. Two things.

First, scale. It moves more product than Amazon and Ebay COMBINED, and that's before even entering the US market. The network effect will dominate.

Second the vast majority of what Amazon and (especially!) Ebay sells is made in factories in China anyway. Alibaba will allow cheaper prices for the same products without having to go through the middlemen and let Ama/Eba skim off profits in the middle.

If i can buy a part directly from the manufacturer in China for $3.99, I'm not going to pay $11.99 for Amazon to deliver it to me or even $5.99 for an Ebay reseller.

Alibaba will have a price advantage on the other big players, and that's what'll matter in the end.

I sure wouldn't be wanting to hang onto Amazon or Ebay stock right now (assuming either have stock, sorry I don't keep track of things like that).

Why is Alibaba selling IPO in USA?

[Spy Handler]

It's a Chinese company located in China, and most of its business and customers are in China. So why is it doing its IPO on the US stock market?

Shouldn't NYSE/Nazdaq disallow this? SEC and FTC have no jurisdiction in China or anywhere else outside the USA. If a chinese company listed on NYSE did fraudulent accounting or whatever, SEC can't do jack shit about it.

The whole thing seems like a clever scheme by Chinese companies and Goldman Sachs to sucker money out of U.S. investors.

Re:Why is Alibaba selling IPO in USA?

[pitchpipe]

The whole thing seems like a clever scheme by Chinese companies and Goldman Sachs to sucker money out of U.S. investors.

It is. What do you really own with Alibaba? The websites? No.

What's really for sale: When investors buy Alibaba, they are actually purchasing shares in a Cayman Islands entity called Alibaba Group Holding Limited.

But that company -- surprise! -- doesn't actually own Alibaba. Instead, Ma and another co-founder, Simon Xie, own most of Alibaba's biggest businesses according to Chinese law. Ma and Xie are then under contract to turn profits over to the Cayman entity.

The arrangement is called a variable interest entity (VIE), and is necessary to get around China's strict foreign investment rules. But investors should be aware of the structure -- especially since Chinese courts have not clarified the legality of the arrangement.

Voting rights and control in the company? No.

So what the fuck do you actually own? Hope and promises. My ex-wife gave me those.

P.S. Even the Hong Kong stock exchange spurned Alibaba.

Re:Why is Alibaba selling IPO in USA?

[fermion]

The story is the owners want to maintain control, even if they do not maintain a controlling interest. They set up a shell company in the cayman islands which is nominally linked to the profits of the actual company, and as far as I can tell are in fact selling shares in that shell company. So the company that is being purchased in not in china, and the business model will probably be international.

As far as why this is allowed, it is a lot of money. The banks and firms who are managing the IPO are US and will make a lot of money. The persons and firms who are allowed to buy or are given the stocks will make a lot of money when they resell the stock, either immediately, or in a few months when principles are allowed to resell stock.

It seems that the sale is on shaky ground, given that the Chinese government can likely do any number of things to make the shell company worthless. I think what some may be hoping is that the Alibaba can quickly expand out of china and preserve value as a worldwide conglomerate type thing. At a basic level this is further indication that there is a lot of capital out there, and for some reason the people who have it think it is better to risk it on the occasional potential high return scheme than use it to build long term infrastructure. I guess no matter how much money one have, one always is susceptible to a get rich quick scheme,

IPO wasted nearly $10B

[Citizen of Earth]

The IPO also wasted nearly $10B considering that the issue price was $68 and it started trading at $95. I just can't understand the logic behind the IPO mechanism. The purpose of an IPO is to raise as much capital as possible for a company to enable it to grow. However, 41% of the IPO value didn't go to the company; it went to lottery-winning middle men who were given shares for $68 and immediately flipped them to the open market.

An IPO should operate like a Dutch auction, with company having a trading account loaded with all of the IPO shares and starting sale for at a high valuation like $200 and then ticking down 1% every minute that "too few" shares are sold. This maximizes the haul for the IPO company by not squandering billions of dollars on bank insiders.