This week, the global financial markets are buzzing with news about an initial public offering. The much talked about IPO isn’t for Facebook or Twitter or any company you have probably heard of before — it is for Alibaba, a Chinese e-commerce company specializing in everything from business-to-business web portals to online marketplaces.
By issuing 320.1 million shares, Alibaba’s IPO is priced at $68, the top of the company’s expected range, and raised $21.8 billion on Thursday, one of the largest IPOs ever, making other prominent IPOs look small in comparison: Facebook, General Motors and Visa all raised less than $20 billion in their IPOs.
After the IPO, Alibaba’s valuation is $167.6 billion, putting it in the same league as heavy hitters like Facebook and Amazon. One of the largest U.S. companies, based on market cap, is Apple at $600 billion.
Large institutions were enthusiastically demanding Alibaba’s shares earlier this week. However, there are also concerns about the corporate governance structure of the company that gives limited rights to shares than the typical company listed on U.S. stock exchanges. Unlike with a familiar company like Facebook, the small retail investor in the United States would not be as familiar with Alibaba’s products, and small investors typically get very little allocation of shares in “hot” IPOs.
Alibaba was founded in 1999 by Jack Ma, a former English teacher, and currently dominates more than 80 percent of the e-commerce market in China, functioning as an amalgamation of an eBay, Amazon and PayPal. Alibaba runs two online marketplaces, Taobao and Taomall. The former, the much larger of the two, is focused on small retailers while Taomall connects larger companies to consumers. In addition, customers can use apps to make dinner reservations, book movie tickets or call a cab. Alipay lets users make payments and even invest. So far, the company has focused on the large Chinese market, but its ambitions are certainly global.
While Ma and other investors will benefit from the IPO, outside groups will as well, especially financial institutions.
The New York Stock Exchange beat out other exchanges to obtain the listing, and Alibaba will trade under the ticker symbol BABA. The company will pay its bankers 1 percent in fees, so with the $21.8 billion currently raised, the fees will amount to $218 million. Bankers from Credit Suisse, Deutsche Bank, Goldman Sachs, J.P. Morgan, Chase, Morgan Stanley and Citigroup will take home the bulk of the fee, and 29 other banks will have junior roles in the offering. Alibaba is likely to use some of the capital raised from the IPO to go on a buying spree of other companies, and this will again benefit the bankers when they play a role in helping Alibaba make acquisitions.
Yahoo stands to benefit dramatically from the IPO. In 2005, Yahoo bought 40 percent of Alibaba for $1 billion, and still owns 22.4 percent of the company. Yahoo’s stake is now valued at more than $31 billion.
Given the company’s ambitious goals and plans, it won’t be long before the U.S. consumer will become even more familiar with Alibaba as the company expands globally. With a market valuation that places it against U.S. e-commerce rivals, in the next few years, we may see Alibaba taking its place in the international market as the next Apple, Google or Microsoft.
Reena Aggarwal is a professor of finance in the McDonough School of Business and Director of the Georgetown Center for Financial Markets and Policy.