Last fall
it was Twitter. Before that, it was
Facebook. Now it’s Alibaba, the huge
Chinese e-commerce company that just became the largest tech IPO in history,
after raising $21.8 billion in its initial public offering on September 18.
As it turns
out, Facebook and Twitter turned out to be decent investments at their IPO
price. Post-IPO buyers purchased Twitter
shares at roughly $45 a share, and over the nearly 12 months since, the stock
has climbed to around $50--an 11% return that is below what the market as a
whole has delivered, but above the negative returns most investors experience
in the first year after a public offering.
Facebook has done better, starting life at $38 a share in May of 2012,
following a very bumpy path that saw investors deeply under water for months,
and then recovering so that shares are now trading around $75.
Will
Alibaba continue the streak? Amid all
the hype, one voice to listen to is veteran emerging markets analyst/manager
Mark Mobius, of Franklin Templeton Investments.
Mobius acknowledges that Alibaba has some interesting
fundamentals--including a return on equity of 24%, operating margins of 26% and
revenue of $1.02 billion, making it by far the biggest e-commerce engine in
China.
But he also
notes that the company has an unusual corporate structure that could lead to
problems for investors down the road. He
warns that the company’s ownership team controls the board of directors, which
means that if shareholders are concerned about the direction of the company, or
if the owners decide to loot the assets and put the money in their own pockets,
well, there isn’t much shareholders could do about it.
What,
exactly, did investors buy in this IPO?
In most cases, IPO investors are purchasing direct ownership shares of
the company. But Alibaba is listed as a
variable interest entity, which creates a somewhat more complicated ownership
structure. The bottom line is that
shareholders, in this public offering, are actually buying a stake in a company
registered in the Cayman Islands, which has a contract to share in Alibaba’s
profits. If shareholders ever became
concerned about Alibaba’s management decisions, they would have to go to a
Chinese court to get redress. It is hard
to imagine a positive outcome for American investors.
Along this
line, it is interesting to note that the original plan was for Alibaba to go
public on the Hong Kong stock exchange, but the Hong Kong regulators declined
to allow it, citing concerns about (you guessed it!) the ownership structure
and fairness to Hong Kong investors. The
New York Stock Exchange may have been more focused on a big payday than on
consumer protection when it allowed the company to list in the U.S.
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