Alibaba’s initial public offering (IPO) on Friday in New York was a huge success. There is no doubt that at US$21.8 billion, it was the largest-ever US-listed IPO and it is possible that the figure could rise to US$25.02 billion if underwriters exercise an option to sell more shares, which might make it the biggest IPO in the world.
However, now comes the hard part. Alibaba will have to keep its e-commerce business moving ahead to justify its high valuation and meet market expectations. Not to imply that Alibaba’s business fundamentals are poor, but the company is facing challenges, including a slowing economy in China, and ever-increasing market competition.
There was also an important issue that received little attention in the run-up to Friday: Alibaba has a complex corporate structure where the ownership of its shares does not translate to having an influence on its management and getting hold of its Chinese assets.
Alibaba shares surged as high as 40 percent on its New York debut, a sign that investors value the company’s profitability outlook more than the potential risk that its management team might exploit deficiencies in corporate governance.
No one ever said investors behave rationally.
Alibaba is among several Chinese companies listed on US stock markets, including as Baidu, Sohu and Renren, that use the so-called “variable interest entity” (VIE) corporate structure to get around China’s strict foreign investment rules and fend off potential challenges by foreign shareholders. Under Alibaba’s VIE structure, investors buying its New York-listed shares actually own stakes in a Cayman Islands-registered entity, which is controlled by a partnership through a series of shell companies.
While Alibaba investors will receive a return on their investment like other stock investors, they have little title to the company’s online platforms such as Taobao and Tmall, nor do they have title to any of the company’s other Chinese assets.
If investors want to enforce their rights or make decisions about the company’s operations, they will have to do so based on the contracts between the Cayman Islands entity and Alibaba.
This is hardly what investors expect from the Chinese retailer giant. Despite the market euphoria over a potential stock rally, Mark Mobius, emerging market chief for Franklin Templeton Investments, warned in an interview last week with CNNMoney.com that Alibaba’s complicated ownership structure could mean little legal recourse should problems emerge at the company. He said it was a “very dangerous situation” for shareholders.
Another concern about Alibaba is its unusual management structure, in which a small group of executives, including chairman Jack Ma (馬雲), can nominate the majority of the board, even though they may only have a minority interest in the company, leaving investors with virtually no influence over the management.
It is worth noting that when Ma announced he would take Alibaba private in 2012 in Hong Kong, he wanted to use the move to strengthen his control over the company. He still has no intention of relinquishing control over the company and its assets.
It is not yet clear if Alibaba’s partnership management structure will help perpetuate the company’s innovative culture, as Ma once claimed. However, it is clear that investors are making bets on the people who run the company.
Friday’s IPO does not appear to have dampened investors’ enthusiasm for Alibaba. The main reason could be that there is real demand for Chinese stocks, let alone the temptation of something the size of Alibaba’s IPO, and investors going on a buying frenzy are those with higher risk tolerance.
Nevertheless, long-term questions about the company’s corporate governance remain and Alibaba will certainly face increasing scrutiny on Wall Street over its complex corporate structure.
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