Alibaba IPO Has Unusual Challenges for Bankers
Alibaba IPO Has Unusual Challenges for Bankers
A Chinese Company, Incorporated in the Cayman Islands, Listing on U.S. Markets
By
TELIS DEMOS and
MATT JARZEMSKY
Aug. 11, 2014 11:12 a.m. ET
Alibaba's headquarters in Hangzhou, China. The listing of a Chinese Internet giant poses unique challenges for bankers seeking to drum up demand for the shares. Bloomberg News
As Alibaba Group Holding Ltd. heads toward what could be the biggest-ever initial public offering, its bankers are homing in on one of their biggest challenges: keeping the shares aloft once they start trading.
While all big IPOs are tough to pull off, the e-commerce company faces some unique hurdles.
For a start, the deal is likely to total more than $20 billion, according to people with knowledge of it. Bankers figure they will need to drum up orders for as much as four times the size of the deal from big institutional investors to create enough fervor to keep the shares rising in the days after it goes public, the people said. That will require seeking some buyers willing to pony up $1 billion or more for a slice of the deal to ensure demand.
As Alibaba nears its initial public offering, the company and its bankers are facing some potential challenges in trying to put together what could be the biggest stock sale of all time. WSJ's Dennis Berman joins Sara Murray on the News Hub.
"This is the stuff that keeps me up at night," said one person involved in the sales process.
Alibaba already faces the task of introducing itself to U.S. investors, who may not know the business because it mostly operates in China. It also has had to answer questions from regulators and investors about its governance structure, which empowers a group of partners to nominate a majority of the corporate board, and the structure of some of its assets, which due to China's foreign-ownership limits are separately owned by outside companies, people familiar with the deal have said.
Then there is a longer-term challenge. Although Alibaba is a Chinese company, it is incorporated in the Cayman Islands and will list on U.S. markets. That means Alibaba, once public, won't qualify to be included in many major benchmarks such as potentially the S&P 500 or some of theMSCI Inc. MSCI +1.30% indexes tracked by funds commanding trillions of dollars. If a stock isn't in a certain index, some funds can't buy it. (See an interactive guide to Alibaba.)
The S&P 500 index includes only companies that are domiciled in the U.S. The index is among the world's most closely followed by investors, with some $5.1 trillion worth of assets tracking it, according to S&P Dow Jones Indices.
Some Chinese and emerging-market indexes that normally include non-U.S. companies may also exclude the company because of the unusual three-legged structure. Its corporate domicile and chosen listing venue preclude it from joining most of the biggest indexes from FTSE Group and MSCI focused on China and emerging markets, the companies said.
What Is Alibaba? An Interactive Guide
Tony Ursillo, technology equity analyst and portfolio manager at Loomis, Sayles & Co., which manages $221 billion in assets, said Alibaba's "lack of eventual presence in some major indexes will affect institutional ownership of the stock." But the company will still have large, long-term shareholders, namely strategic investors Yahoo Inc. YHOO -0.33% andSoftbank Corp. 9984.TO -0.39% , he noted, cushioning the lack of index money.
Index funds seek to have the same stocks and weightings as the index they track. Other funds are benchmarked to indexes, meaning they will hold at least a portion of the same stocks.
Some passive index funds also don't buy directly into IPOs and must wait until the index inclusion officially occurs. But large IPOs have been supported at least in part by demand from more-active funds that buy the stocks immediately in anticipation of them being added to an index, which can be months after the IPO. That helped buttress demand for Facebook Inc. FB +0.52% 's huge IPO, as well as mega-IPOs such as those by General Motors Co. GM +0.81% and Visa Inc. V +0.06%
Still, exclusion from the index can be a benefit, too. Dennis Hudachek, senior ETF analyst at ETF.com, which tracks exchange-traded funds, said some fund managers seeking to outperform an index might add Alibaba if they believe it will do well.
Jason Schneider
The risk of not having sufficient after-market demand was illustrated by Facebook, which managed to pull off the biggest-ever technology IPO at $16 billion in 2012 but saw its stock fall sharply from its offering price through its first few months of trading.
Alibaba also will have to court an unusually wide swath of investors, because funds dedicated solely to buying Chinese firms—the most obvious source of demand—may not be able to generate the kind of buying needed, people familiar with the deal have said. That means Alibaba will have to pitch itself to portfolio managers focused on every sector, from Asia to Internet retailing to consumers, even targeting broad general global funds.
The effort could involve convincing managers that Alibaba also fits the bill for general Internet investments, perhaps better than managers' existing positions in companies such as eBay Inc. EBAY -0.39% or Amazon.com Inc., AMZN +0.48% they said.
"If someone wants to spend $1 billion on Alibaba, they don't have that money sitting around in a drawer," said a person involved with the IPO sales process.
Some firms may be able to find money for Alibaba by selling other companies that own large stakes in Alibaba, including Softbank and Yahoo. Alibaba may also be seen as a replacement for a range of other Chinese stocks because the company can be viewed as a broad play on the growth of Chinese consumption.
But others may have overall limits on their exposure to China across their portfolios, because of the perceived riskier nature of stock investments there.
Andrew Cupps, chief investment officer at Cupps Capital Management LLC, a Chicago investment firm that oversees $1.3 billion, said his funds tend to focus on U.S. stocks but allow for 5% or 10% of the fund to be invested in foreign-based companies' shares. He said he doesn't know yet whether he will buy Alibaba.
And unlike some of the large Chinese IPOs of recent years, Alibaba won't have the same access to domestic Chinese retail demand, which has been sizable in previous deals. Outside of qualified institutions including sovereign-wealth fund China Investment Corp., there are limits on the ability of individuals to buy stocks solely listed overseas.
A Chinese Company, Incorporated in the Cayman Islands, Listing on U.S. Markets
By
TELIS DEMOS and
MATT JARZEMSKY
Aug. 11, 2014 11:12 a.m. ET
Alibaba's headquarters in Hangzhou, China. The listing of a Chinese Internet giant poses unique challenges for bankers seeking to drum up demand for the shares. Bloomberg News
As Alibaba Group Holding Ltd. heads toward what could be the biggest-ever initial public offering, its bankers are homing in on one of their biggest challenges: keeping the shares aloft once they start trading.
While all big IPOs are tough to pull off, the e-commerce company faces some unique hurdles.
For a start, the deal is likely to total more than $20 billion, according to people with knowledge of it. Bankers figure they will need to drum up orders for as much as four times the size of the deal from big institutional investors to create enough fervor to keep the shares rising in the days after it goes public, the people said. That will require seeking some buyers willing to pony up $1 billion or more for a slice of the deal to ensure demand.
As Alibaba nears its initial public offering, the company and its bankers are facing some potential challenges in trying to put together what could be the biggest stock sale of all time. WSJ's Dennis Berman joins Sara Murray on the News Hub.
"This is the stuff that keeps me up at night," said one person involved in the sales process.
Alibaba already faces the task of introducing itself to U.S. investors, who may not know the business because it mostly operates in China. It also has had to answer questions from regulators and investors about its governance structure, which empowers a group of partners to nominate a majority of the corporate board, and the structure of some of its assets, which due to China's foreign-ownership limits are separately owned by outside companies, people familiar with the deal have said.
Then there is a longer-term challenge. Although Alibaba is a Chinese company, it is incorporated in the Cayman Islands and will list on U.S. markets. That means Alibaba, once public, won't qualify to be included in many major benchmarks such as potentially the S&P 500 or some of theMSCI Inc. MSCI +1.30% indexes tracked by funds commanding trillions of dollars. If a stock isn't in a certain index, some funds can't buy it. (See an interactive guide to Alibaba.)
The S&P 500 index includes only companies that are domiciled in the U.S. The index is among the world's most closely followed by investors, with some $5.1 trillion worth of assets tracking it, according to S&P Dow Jones Indices.
Some Chinese and emerging-market indexes that normally include non-U.S. companies may also exclude the company because of the unusual three-legged structure. Its corporate domicile and chosen listing venue preclude it from joining most of the biggest indexes from FTSE Group and MSCI focused on China and emerging markets, the companies said.
What Is Alibaba? An Interactive Guide
Tony Ursillo, technology equity analyst and portfolio manager at Loomis, Sayles & Co., which manages $221 billion in assets, said Alibaba's "lack of eventual presence in some major indexes will affect institutional ownership of the stock." But the company will still have large, long-term shareholders, namely strategic investors Yahoo Inc. YHOO -0.33% andSoftbank Corp. 9984.TO -0.39% , he noted, cushioning the lack of index money.
Index funds seek to have the same stocks and weightings as the index they track. Other funds are benchmarked to indexes, meaning they will hold at least a portion of the same stocks.
Some passive index funds also don't buy directly into IPOs and must wait until the index inclusion officially occurs. But large IPOs have been supported at least in part by demand from more-active funds that buy the stocks immediately in anticipation of them being added to an index, which can be months after the IPO. That helped buttress demand for Facebook Inc. FB +0.52% 's huge IPO, as well as mega-IPOs such as those by General Motors Co. GM +0.81% and Visa Inc. V +0.06%
Still, exclusion from the index can be a benefit, too. Dennis Hudachek, senior ETF analyst at ETF.com, which tracks exchange-traded funds, said some fund managers seeking to outperform an index might add Alibaba if they believe it will do well.
Jason Schneider
The risk of not having sufficient after-market demand was illustrated by Facebook, which managed to pull off the biggest-ever technology IPO at $16 billion in 2012 but saw its stock fall sharply from its offering price through its first few months of trading.
Alibaba also will have to court an unusually wide swath of investors, because funds dedicated solely to buying Chinese firms—the most obvious source of demand—may not be able to generate the kind of buying needed, people familiar with the deal have said. That means Alibaba will have to pitch itself to portfolio managers focused on every sector, from Asia to Internet retailing to consumers, even targeting broad general global funds.
The effort could involve convincing managers that Alibaba also fits the bill for general Internet investments, perhaps better than managers' existing positions in companies such as eBay Inc. EBAY -0.39% or Amazon.com Inc., AMZN +0.48% they said.
"If someone wants to spend $1 billion on Alibaba, they don't have that money sitting around in a drawer," said a person involved with the IPO sales process.
Some firms may be able to find money for Alibaba by selling other companies that own large stakes in Alibaba, including Softbank and Yahoo. Alibaba may also be seen as a replacement for a range of other Chinese stocks because the company can be viewed as a broad play on the growth of Chinese consumption.
But others may have overall limits on their exposure to China across their portfolios, because of the perceived riskier nature of stock investments there.
Andrew Cupps, chief investment officer at Cupps Capital Management LLC, a Chicago investment firm that oversees $1.3 billion, said his funds tend to focus on U.S. stocks but allow for 5% or 10% of the fund to be invested in foreign-based companies' shares. He said he doesn't know yet whether he will buy Alibaba.
And unlike some of the large Chinese IPOs of recent years, Alibaba won't have the same access to domestic Chinese retail demand, which has been sizable in previous deals. Outside of qualified institutions including sovereign-wealth fund China Investment Corp., there are limits on the ability of individuals to buy stocks solely listed overseas.
