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Business Management

Alibaba IPO: An International or Chinese Push?

Chinese web and e-commerce giant Alibaba Group has finally fired the starting pistol on its much-anticipated initial public offering, which will be held in the US and not its home country. However, despite claiming that listing Stateside is a deliberate move to make it “a more global company”, this IPO is very much aimed at funding expansion back home.

Much has still to be revealed by Alibaba, a firm set-up back in 1999 by former English teacher Jack Ma in his flat in eastern China’s Hangzhou. For one, we don’t know exactly when the IPO will take place, on which stock market and how much it wants to raise. What we do know is the firm has snubbed Hong Kong, where it’s thought to have originally favoured listing. It was forced to look elsewhere because Hong Kong’s exchange does not allow firms to retain the right to elect their board after going public, as Alibaba wanted.

The firm had the following brief statement:

Alibaba Group has decided to commence the process of an initial public offering in the United States. This will make us a more global company and enhance the company’s transparency, as well as allow the company to continue to pursue our long-term vision and ideals. Should circumstances permit in the future, we will be constructive toward extending our public status in the China capital market in order to share our growth with the people of China.

What’s a ‘baba worth these days?

All the talk at the moment is on exactly how much the firm could be worth. No analysts interviewed for this article were prepared to speculate but most reports estimate anywhere between US$140-200bn, with the IPO proceeds topping $15bn (£9bn). This would easily make it the biggest tech IPO since Facebook, which raised $16bn two years ago.

If you believe Goldman Sachs it’s more likely to be valued at $150bn, while Macquarie Group has put the figure at a more optimistic $200bn, which would make it the world’s second biggest web firm after Google. It’s not hard to see why. Alibaba operates by far the most popular e-commerce sites in China (TMall and Taobao), and China is on track to become the world’s largest market for online shopping by 2015-16. Although it doesn’t disclose sales figures, shareholder Yahoo! did, claiming Alibaba pulled in a net income of $792m in the quarter ending September 2013, with revenue rising 51% to $1.78bn. CEO Jonathan Lu also went on record last year as saying he expects the firm to triple its volume of transactions to post around three trillion yuan ($490bn) by 2016.

Those stats will be music to the ears of Yahoo! and Softbank investors. The former still has a 24% stake in Alibaba, while the Japanese operator is the firm’s biggest shareholder with 37%. In fact, Yahoo!’s Alibaba stake, ironically pushed through by much derided co-founder Jerry Yang nine years ago, has made CEO Marissa Mayer’s job an awful lot easier at the helm of the ailing internet pioneer.

Splashing cash on the cloud

So what will Alibaba do with its IPO-gotten gains? Well, buy back most of its Yahoo! and Softbank shares for one thing, according to Gartner principal research analyst, Jane Zhang. She added that while listing in the US could help Alibaba’s services gain more traction abroad, the primary reason is not to make it a “more global company” but to raise money to expand at home and take on arch rival Tencent.

“The main purpose is to compete better in the local market,” she argued. “The money is important not only in order to expand the business in China but to fund more internal resources to improve their hybrid and cloud service to small and medium customers.”

This cloud and infrastructure play is a major element of Alibaba’s growth strategy. Under its Aliyun business, the firm is trying to expand out of “traditional retail” to offer customers cloud hosting, load balancing, storage, transactional services and more for their e-commerce operations. The money needed to fund spending on this infrastructure, as well as expansion of its core e-commerce business, Alipay payment service, Yu’e Bao financial services platform, Laiwang messaging service and the development of its AMOS mobile operating system, will not come cheap. 

Mobile is in fact a key channel that Alibaba needs to improve in to take on its Shenzhen-headquartered rival Tencent. The web giant listed on the Hong Kong exchange nearly a decade ago and is now valued at around $140bn. Its near-ubiquitous QQ messaging service and Whatsapp-like WeChat have made it pre-eminent in social and mobile communications. By contrast, Alibaba’s Laiwang has been a failure in China. Now Tencent is also threatening its rival, having taken a 15% stake in second placed e-commerce player JD.com and also stating plans to list in the US.

“JD.com is not a challenger to Alibaba in terms of transaction volume or branding but by collaborating with Tencent it could be a big challenge in the mobile avenue in the future,” said Zhang.

This is not to say Alibaba has failed to acknowledge the threat, according to Forrester analyst Xiaofeng Wang. 

“Alibaba Group is riding the wave of mobile quite successfully by its investment in Sina Weibo, AutoNavi, Kuaidi Taxi and the effort on the Taobao mobile app,” she explained.

“During the Singles Day [shopping event] last year, close to 20% of its revenue — 5.35bn out of 35.019bn yuan — was driven through mobile. As Chinese consumers spend more and more time on their phones, especially for shopping, Alibaba is on the right track.”

 

 

John Anderson has been writing about technology and all things Asia for over a decade, having started out on some of the UK's best known best-known IT trade titles. From his perch in the Far East he keeps a keen eye on the global significance of emerging trends in the region. 

 

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John Anderson

John Anderson has been writing about technology and all things Asia for over a decade, having started out on some of the UK's best known best-known IT trade titles. From his perch in the Far East he keeps a keen eye on the global significance of emerging trends in the region. 

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