Alibaba Group Holding Ltd., the e-commerce company started in 1999 with $60,000 cobbled together by Jack Ma, Thursday cemented its status as a symbol of China’s economic emergence by raising $21.8 billion in a U.S. initial public offering.
The company and shareholders including Yahoo! Inc. sold 320.1 million shares for $68 each, after offering them for $66 to $68, said a person with knowledge of the matter who asked not to be identified according to data compiled by Bloomberg. The sale — which values Alibaba at $167.6 billion — is already the largest by any company in the U.S. and has the potential to break the global record if additional shares are sold to underwriters.
Ma, a former English teacher who started the company in his Hangzhou apartment, drew crowds of money managers to meetings held around the world as the company pitched itself to investors. Alibaba profited from China’s burgeoning consumer class by dominating the e-commerce industry in the country of 1.36 billion people.
At recent meetings, Alibaba’s founder focused on the company’s ambitions outside of both the e-commerce field and its home base, describing it as an “Internet company that happens to be from China.”
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Alibaba’s ability to close a deal of this size is also owed to an almost non-stop rally in shares in the U.S. — where about $15 trillion has been added to the value of equities amid three rounds of monetary stimulus from the Federal Reserve, an expanding economy and record profits.
“They want to get in now before the market is no longer excited,” said Kevin Headland, director of the portfolio advisory group at Manulife Asset Management Ltd. in Toronto.
Headland, whose firm manages $281 billion, plans not to invest in the shares right away. “It’s prudent to sit back and evaluate a company instead of getting caught up in the excitement.”
The IPO — anticipated for years — hasn’t been achieved without setbacks for Alibaba. The company would have preferred to debut in Hong Kong, though listing rules in the city don’t allow the company’s governance structure.
A small group of insiders at Alibaba control the company’s board, the kind of arrangement that’s permitted in the U.S., where founders of technology companies often maintain control through dual-class shareholdings.
Alibaba provides various marketplaces for buyers and sellers as well as services that help them conduct their businesses. Taobao Marketplace, started in 2003, enables millions of individuals and small businesses to sell products. Tmall.com provides a virtual shopping mall, with retailers and brands offering products, and Juhuasuan operates a flash-sales model.
As Alibaba executives met investors this month, they were queried about issues ranging from how the company plans to prevent selling counterfeit objects on its marketplaces to Alibaba’s relationship with its payments affiliate — Alipay — which is now effectively controlled by Ma.
$90 Fair Value
None of those factors were enough to substantially weaken demand for its shares, with Alibaba’s growth prospects too compelling for many to ignore. The concerns may have kept the company and its advisers from pushing the price too high, like Facebook Inc. did when it debuted in 2012. Facebook’s shares plunged in the months after its IPO before eventually recovering.
“Perhaps learning lessons from Facebook’s IPO, Alibaba’s current pricing range strikes us as conservative, and we do not believe the valuation fully reflects the features that make the wide-moat Alibaba investment story unique,” Morningstar Inc. analyst R.J. Hottovy wrote in a note to clients. Morningstar has a fair value estimate of $90 per share on the company.
Alibaba’s profits also make it a standout among technology IPOs. Twitter Inc. raised more than $2 billion last year, and Chinese rival JD.Com Inc., which has achieved a $40 billion valuation, raised about $2 billion in May — both without any annual earnings. Alibaba by comparison turns about half of its sales into income.
At $68 a share, Alibaba is valued at 29 times expected earnings for the year through March — below multiples fetched by Chinese and U.S. rivals including Tencent Holdings Ltd., Baidu Inc., and Amazon.com Inc. Analysts forecast that Alibaba’s earnings will grow 50 percent in fiscal 2015 from the previous 12 months.
“This isn’t a situation where you’d see a high-growth company fall down to earth -- it’s a very sustainable business model,” said Eric Brock, a portfolio manager at Clough Capital Partners, which oversees more than $4.5 billion in assets including the Clough China Fund.
Mainland Internet users have grown to 632 million and could exceed 850 million by 2015, according to government data. Alibaba has been seen as a proxy for this growth with its 279 million active buyers in the year through June, according to its prospectus. This scale has enabled the company to generate revenue of $8.46 billion in the year through March.
Profit in the first quarter surged as advertisers boosted spending on the Tmall and Taobao platforms. Net income almost tripled to $1.99 billion, or 84 cents a share, in the three months ended June 30.
Alibaba’s home also raises risks for investors. Like many Chinese companies, Alibaba will rely on a legal structure known as a variable interest entity, or VIE, required by the Chinese government for foreign ownership of certain industries, including Internet companies. While Alibaba gets most of its revenue from wholly foreign-owned enterprises, if China revokes its VIE license, U.S. investors could be affected, filings show.
“I remain concerned about the dangers that these structures pose,” Senator Robert Casey, a Democrat from Pennsylvania, said in a letter to the U.S. Securities and Exchange Commission this week.
One factor that could weigh on stock early is that some Alibaba insiders will be able to sell shares right away, instead of waiting for a typical lockup period to expire. About 18 percent of Alibaba’s shares won’t be subject to a lockup — which is more than the amount Alibaba and its backers are selling in the IPO itself, regulatory filings show.
Some investors chose not to invest in the IPO, even though they’re enthusiastic about Alibaba’s prospects. Don Gimbel, global portfolio manager at Geneva Advisors LLC in Chicago, said he would sit out the debut to see how investors react once the shares begin to trade.
“I don’t know how to value it at this point of time and that’s why I want to wait and see what the market says,” he said in an interview before the price was determined. “To say Mr. Ma is a great salesman is the understatement of the year. He’s got a great product and I think the diversification Alibaba is able to achieve because of its uniqueness in China is spectacular.”
Alibaba will be listed on the New York Stock Exchange and trade under the symbol BABA starting Friday.
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