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Alibaba logo (Photo: dpa)
Image: picture-alliance/dpa

Alibaba goes Wall Street

Miriam Braun / hg
September 8, 2014

Mix together Amazon and eBay with PayPal and Google - and you get a good picture of Alibaba's business. The Chinese e-commerce giant is going public in New York - and is celebrating the biggest-ever tech IPO.


It's something of a coup for Wall Street - launching the biggest-ever technology IPO on the New York Stock Exchange (NYSE). Oftentimes, IT companies have instead opted to go public on the tech-heavy Nasdaq exchange.

But Wall Street broker Jason Weisberg believes Chinese e-commerce giant Alibaba probably feels more at home with the NYSE, following the debacle surrounding Facebook's Nasdaq IPO. After all, the NYSE handled the big General Motors IPO quite well a couple of years ago, he said.

The technical difficulties surrounding Facebook's IPO two years ago are anything but forgotten. Back then, the social media network pocketed $16 billion (12.3 billion euros), but its stock price soon tanked.

Alibaba is aiming for $4 billion more, in a bid to mark the largest technology IPO ever in history. Weisberg says the NYSE is an icon, and Alibaba wants to profit from its reputation that comes with it.

Buy Alibaba shares; get a piece of Cayman Islands

Having said this, Wall Street was not Alibaba's first choice. The IT giant already had an IPO in Hong Kong in 2007. But the company was delisted again six years later. Standard & Poor's Capital IQ analyst Scott Kessler says going public in the US is fine for Alibaba as it can keep its structure intact. In Hong Kong, that had not been accepted.

This is because Alibaba is a so-called "variable-interest entity," also called a "special-purpose entity." Whoever buys Alibaba shares doesn't really acquire a stake in the company, but rather a stake in an agency based on the Cayman Islands, an office getting a share of Alibaba's profits. This setup is to circumvent Chinese law preventing foreigners from investing directly in Chinese companies.

This workaround has done the trick for other Chinese companies in the past. Take Baidu, the Chinese equivalent to Google, whose shares have been traded on Nasdaq since 2005. This trend of listing in the US with a view to securing international investors started as early as the 1990s, Kessler told DW.

Investors have almost no say

But this kind of structure leaves investors without any say in important corporate decisions. Alibaba founder Jack Ma and a couple of partners appoint more than half of the supervisory board members themselves.

Alibaba Group Internet page
There's no doubt Alibaba is a force to be reckoned withImage: http://alibabagroup.com

Alibaba's business figures are impressive. The firm draws some 80 percent of its turnover from online retail operations in China. China's e-commerce market is worth some $300 billion a year. By 2020, it's expected to be larger than the British, Japanese, German, French and US online markets combined. Even so, few in the West had even heard of Alibaba before US search engine Yahoo took over a quarter of the Chinese company.

Quite often, US Internet or social media firms face an uphill battle to put down roots in China, Kessler said, as social networks are often missing completely. While that is a huge obstacle for US companies, Chinese firms have enormous opportunities to offer relevant services themselves. The Alibaba-affiliated Taobao trade portal alone attracts some 7 million sellers and traders. And there's next to nothing you can't find for sale there.

Fake luxury items an issue

Earlier this year, Taobao hit the headlines because traders had offered counterfeit luxury goods on the platform. Bob Barchiesi from the International Anti-Counterfeiting Coalition blames China's copycat culture and US consumers' insatiable hunger for bargains.

Alibaba, he said, offers around 800 million items and has some 500 million users, with the sheer scale being part of the problem.

The Chinese company reacted promptly to the criticism, saying that if a producer of luxury items opened its own shop on Alibaba, forged goods offers would immediately be removed from shopping platforms.

The criticism about counterfeiting came when Alibaba was having a hard time convincing the US Securities and Exchange Commission (SEC) of its integrity. Alibaba's stock exchange prospectus has had to be changed three times since it was submitted to the SEC.