Evaluation of Alibaba IPO: Advantages, Disadvantages, and Performance

This report evaluates the IPO issued by Alibaba, discussing the benefits and drawbacks of going public, the motivation behind Alibaba going public, and analyzing the short and long-term performance of the IPO.

Running head: IPO
IPO
Zaidoon Barham
THE UNIVERSITY OF MANCHESTER ALLIANCE MANCHESTER BUSINESS SCHOOL
Student ID10314087

1IPO
Executive summary
Main purpose of the report is to evaluate the IPO issued by Alibaba. In the 1st part of the report
the advantages and disadvantages associated with going public will be discussed along with the
motivation behind Alibaba going public. Further, in the next part the report will focus on why it
is easier comparatively for Alibaba to raise the funds through stock market rather than debt.The
report will also highlight the issues for the new investors regarding VIE applied by the entity.
The report will also analyse the share price at which the IPO issued and will focus on the long
term as well as short performance of the IPO issued by Alibaba.

2IPO
Table of Contents
Answer (i)........................................................................................................................................3
(a) Benefits and drawback of going public.............................................................................3
(b) Motivation behind Alibaba going public..........................................................................3
Answer (ii).......................................................................................................................................4
Answers (iii)....................................................................................................................................5
Answer (iv)......................................................................................................................................6
Answer (v).......................................................................................................................................7
Answer (vi)......................................................................................................................................8
(a) Key tasks executed by underwriter...................................................................................8
(b) Primary considerations for selecting underwriter.............................................................8
(c) Main motivation for syndication.......................................................................................9
Answer (vii).....................................................................................................................................9
Answer (viii)..................................................................................................................................10
(i) Performance comparison in short term...........................................................................10
(ii) Performance comparison in short term...........................................................................10
Answers (ix)...................................................................................................................................11
Conclusion.....................................................................................................................................11
Reference.......................................................................................................................................12

3IPO
Answer (i)
(a) Benefits and drawback of going public
A company should plan out well before going public. This will help them to sustain less
loss if the IPO does not work properly. The companies aspire to expand more and make their
business more fruitful, Therefore, the company usually go for initial public offering (IPO). The
major benefit which the company enjoys is the benefit of raising capital from the market
(Havinga, Hoving and Swagemakers 2016). The capital collected from the market can be used
for investing in the research and development department of the company. Furthermore, the
accumulated capital collected from the market helps the company to fund the capital expenditure.
The company may also use the capital to pay off its debt. IPO are also seen as the generating new
customer group for the company because when the company go for listing with the stock
exchange then the company become more popular among the investors and hence creating a new
market avenue for the company. These phenomena also help the company to increase its market
share. The main disadvantage which prevails under the sheds of the advantage of the IPO is
generally the cost as the company needs to pay a considerable amount of money for financial
reporting document, audit fees and many more cost related with the IPO (Alibabagroup.com
2019). This helps to create a difficult situation for smaller companies who want to expand by
becoming public. The company becoming public creates a risk since the autonomy of the public
company is less in comparison to the private company.
(b) Motivation behind Alibaba going public
The reason behind Alibaba IPO in USA is that the Alibaba Group will have a complete
control in the company in terms of percentage of shares in USA based subsidiary of Alibaba.
Before the IPO the founders of the company did not possess control in terms of percentage of

4IPO
shares in Alibaba subsidiary of US.NYSE being one of the largest stock exchanges in the world
there prevail a prestige matters connected with it (Guldiken et al., 2017). The company getting
listed with the NYSE provides a huge respect and backing by prestige to follow. Listing with
NYSE will help the company in terms of mergers and acquisitions which in turn help the
company by increasing the range of motion.
Answer (ii)
Alibaba has accumulated over $25 billion upon concluding the IPO in NYSE. The
company has accumulated a very large amount in respect to the amount that the company would
be benefitted from the debt. The company tends to expand more in USA after being listed with
NYSE and it became fruitful for the company. The company already holds considerable amount
of goodwill in the whole world (Mansaku, Mansaku and Tampakoudis 2017). Moreover, the
intervention of Alibaba in USA market as a large e-commerce player who can compete with
Amazon which is also the e-commerce large player in USA and other parts of the world. The
reputation which tagged along behind Alibaba leads the company to raise the fund from the
market for the purpose to control rise in debt interest expenses of the company. As said by the
Jack Ma, the co-founder of Alibaba, after the first day training, “that Alibaba has received public
trust from the market no the funds” (Alibabagroup.com 2019).
The companies who are listed with NYSE, enjoys the rules and regulations of NYSE.
Among oneof the rules which made the company benefitted from NYSE is that NYSE has allows
the companies to maintain their control over the company by using share classes (Burke and
Eaton 2016). This rule is applicable for the foreign companies who want to hold majority of their
shares with them. Due to the presence of strict rules which makes every financial statement of

5IPO
the company to be transparent the investors get more trust on the company and hence NYSE is
the most suitable place for trading which increases the trust for the foreign companies among
investors (Alibabagroup.com 2019). The most important part is that NYSE usually does not turn
away any foreign companies and hence it provides a great opportunity for the foreign companies
to do their business in land of opportunity (Li 2016). NYSE provides better opportunity share
capital to grow.Moreover NYSE is a place for a traditional home for the internet based
companies and hence it is tends to become more logical for the company like Alibaba to go for
IPO. Alibaba will have access to new liquidity pool also.
Answers (iii)
Alibaba has planned to use the capital which was raised from the market during its initial
public offering in shore-term funds, debt instruments, bank deposits and interest bearings. The
company mainly focus on investing the proceeds of IPO out of their home country
(Alibabagroup.com 2019). The company has planned to invest in short-term funds which will
help the company to deal with the situations related to creditors, sudden rise in price and many
more. The company also planned to invest in debt instruments because of the law risk nature and
higher returns. Investing in bank deposits also helps the company to access the liquidity when
needed (Li 2015). The company also planned to invest mostly in the subsidiaries which are
present outside of their home country. From the above distribution of the capital it can be stated
that the company is totally focusing in expansion of the business outside China. After analyzing
the brochure of Alibaba for IPO it is advisable for the company to invest in debt instruments.
Through investing in debt instrument the company will gain a considerable amount of benefit in
terms of lower risk and greater return in comparison to other products risks. Moreover the
company will be required to pay the tax which is associated with the debt instruments income.

6IPO
On the other hand banks deposits are less risky but come with lower returns (Petry 2014).
Moreover the company needs to pay the tax against the return of the bank deposits.
Answer (iv)
China based e-commerce entity Alibaba is anticipated to raise huge $ 21.77 billion from
IPO with the share price of $ 68 per share that will make the company’s valuation approximately
$ 167.62 billion. At that share price, IPOwill give Alibaba market valuation of $ 167.6 billion
that will surpass the American corporate icons such as Walt Disney Co and Boeing Co (Barreto
2014). The planned IPO will position Ali Baba into the top of US e-commerce rivals like eBay
and Amazon and will provide more financial firepower to help them in expanding market share
in the US as well as in other markets. Alibaba offered approximately 320 million ADSs
(American Depositary Shares) that were equal to an amount of 320 million of ordinary shares
with the par value of US$ 0.000025 per share. These ADSs amounting to 320 million includes
approximately 197 million of ADSs those were held by different shareholders like Jack Ma,
Yahoo and Joe Tsai. Apart from 320 million ADSs, the entity offered 30 days option of purchase
to the underwriters for purchasing additional 48 million ADSs at same offer price (Clark 2018).
Details of issues are as follows –

7IPO
Out of the total amount $ 7.08 million were paid for purchasing stake from yahoo. From
the above table it can be observed that the net amount available to the company after paying
discounts, commission and other expenses amounted to US$ 13,237.21 million. Hence, it will
not be right to say that Alibaba raised $ 21.77 billion through IPO.
Answer (v)
Variable interest entity or VIE is the legal business structure that is commonly used by
the mainland entities for establishing ownership of the company through a legal agreement as
against direct share ownership. In July 2016 annual report filing Alibaba reported that the
executive chairmen Simon Xie as well as Jack Ma will be giving up the ownership for 4 of the
VIEs owned by them through transferring the ownership to Chinese investment holding entity.
Under the VIE structure of Alibaba its Caymans Islands – incorporated entities has contracts
with VIEs that includes proxy arrangements, loan agreements, exclusive technology services,
exclusive agreements for call option that gave foreign owned Alibaba Company (Guldiken et al.
2017).Xie as well as Ma transferred their ownership effectively for selecting the members of
Alibaba partnership who were citizens of China. Partnership of Alibaba comprised of 36
individuals those have exclusive rights for nominating the simple majority of board of directors
of the entity, with the approval of the shareholders during the AGM. Out of 36 partners, 6 were
the part of Alibaba’s 18 co-founders that includes Ma and Joe Tsai. However, the remaining
partners were the executives who are working for Alibaba at least for 5 years (Alibabagroup.com
2019).
However, Alibaba VIE partnership will have adverse impact on the new investors as
theydo not own the company. Rather they own share in the holding company that is registered in

8IPO
Cayman Island with the claim on some of the profits of Alibaba with no direct stake of
ownership. Moreover, as the investors were not the direct owners of Alibaba, they were not
entitled to vote. However, investors will get share in the profits of Alibaba (Alibabagroup.com
2019).Apart from the VIE, the industry was also concerned regarding other issues like regulatory
issues and government interference.
Answer (vi)
(a) Key tasks executed by underwriter
The underwriters are the financial advisors who mainly perform during IPO and play an
important role. The underwriter’s ensure that the company has maintained and satisfies all the
rules and regulations associated with the exchange board of that country. They also assess the
matters of appropriate structures that fit with the different bodies. They are also responsible for
the availability of all data in terms of financial data to the public (Hartog 2016). The underwriter
also recommends the IPO price to the firm. Additionally, the underwriter helps in identifying
large investors base who usually buy large chunk of shares during initial public offering. It also
helped the company to find the professional advisors like lawyers, agencies, accountants, brokers
and PR Agencies. Underwriter also estimates the evaluation of the firm.
(b) Primary considerations for selecting underwriter
Appointing a correct underwriter falls under the strategy of the company prior to IPO. As
such, a lead underwriter whose reputation in the market is pretty good needs to be
selected. The underwriter should coordinate the effort of the syndicate and help the
company to prepare registration statement (Li 2017). The underwriter performs due

9IPO
diligence and provides initial draft which includes underwriting agreement and lead the
road show to maximise success rate of the IPO. also locks this agreement.
(c) Main motivation for syndication
The underwriter syndicate was appointed to help in selling the full planned shares to
investors. Hence,the syndicate will have access to larger liquidity pool and wider investors base.
(Kim 2018) especially that the IPO size was very large. Therefore, a syndicate of reputable
underwriters are required to have better access to liquidity and investor base and higher success
rate.
Answer (vii)
As per the prospectus, Alibaba set the price through the negotiations among the
representatives and underwriter entities. In addition, it considered the market conditions,
historical performances and business prospects, projections regarding future earnings, market
valuations and management quality for the other entities in the same business. Initially the entity
decided to issue the IPO at the range of US$ 60 – US$66 per ADS. However, later it decided to
increase the issue price to US$ 66 – US$ 68 per ADS owing to high demand from the
institutional investors (Mac 2014). However, as per many experts in the industry this price was
not so aggressive. As per the report of Morningstar, fair value was US$ 90 per ADS based on the
CAGR revenue of 30% and the operating margin that was expected to go up to 50.20% from
47.50%. Finally the entity issued the IPO at US$ 68 per ADS. 1st trade of the share was executed
at US$ 92.70 per share that was well above the issue price of US$ 68 (Tse 2015). Within few

10IPO
minutes of the opening of trade share price went up to US$ 99 per share. By the close of the day
the share price was up by 38% as compared to the offer price that was significantly higher as
compared to the issue price (Alibabagroup.com 2019). However, keeping in mind the decline
trend of China’s GDP and ageing population along with the increased competition with eBay and
Amazon it is expected that Alibaba will not be able to maintain the growth for long time. Hence,
it is appropriate to purchase the shares at US$ 68 for the short term investors who want to earn
quick gain. However, for long-term investors it is not a wise choice as on the long term they may
have to face losses (Alibabagroup.com 2019).
Answer (viii)
During the period of 1993 to 2013, 168 entities from Hong Kong at least went public
under the US organized stock exchanges excluding reverse mergers (Forbes.com 2019)
(i) Performance comparison in short term
In the short run Chinese IPO provides 66% return on an average and the under-pricing as
well as overvaluation is between 14-22% and 44-53% whereas Alibaba IPO provided 38% return
initially. Hence, it provided lower return as compared to average IPOs (Gracie 2014).
(ii) Performance comparison in short term
Average return from offer price to end of 1st day trading was 20% identical to average for
the US entities. Over the future 3 years average return from these 168 Chinese IPOs was -3.6%
that is near about -1% per year. Investors who hold the investment for some time say 3 years
would have earned average 23% that is approximately 8% per year. Hence, the Chinese IPOs
underperformed 9% per year as compared to US market. In case of Alibaba that went public with
high PE ratio required to grow the profits significantly for providing good return to its investors.

11IPO
Alibaba’s PE ratio is 50 with profit of $ 3.6 billion in 2013. Further it has potential for growth
for the profit however the investors will not receive their fair share. Hence, it provided lower
return as compared to average IPOs (Gillis and Lowry 2014).
Answers (ix)
(Amount in millions)
From the above calculation it is evident that the company is in a very good position as in
terms of capital structure and low debt. The company’s equity exceeds 66% and the debt prevails
lower than 35% which suggest solid capital structure and therefore it provide necessary resource
to expand the business and generate additional profits in the future.
Conclusion
From the above discussions it can be concluded that at the initial stage of issuance of IPO
Alibaba recorded sizable growth for investors however, for the long term the same growth rate
cannot be expected. Markets may exaggerate with the correction considering the decline in
growth rates. Henceforth, it is appropriate to purchase the shares at US$ 68 for the short-term
investors who would like to earn quick gains. However, for long-term investors it is not a wise
investment choice as the share price is most likely drop.

12IPO

13IPO
Reference
Alibabagroup.com., 2019. Alibaba Group. [online] Available at:
https://www.alibabagroup.com/en/global/home [Accessed 20 May 2019].
Barreto, E., 2014. Alibaba IPO ranks as world's biggest after additional shares sold. Reuters.
Burke, Q.L. and Eaton, T.V., 2016. Alibaba group initial public offering: a case study of
financial reporting issues. Issues in Accounting Education Teaching Notes, 31(4), pp.75-90.
Clark, D., 2018. Alibaba: the house that Jack Ma built. HarperCollins Publishers.
Forbes.com., 2019. Alibaba And The Long-Run Performance Of Chinese IPOs. [online]
Available at: https://www.forbes.com/sites/jayritter/2014/05/08/alibaba-and-the-long-run-
performance-of-chinese-ipos/#66c7650e504f [Accessed 23 May 2019].
Gillis, P. and Lowry, M.R., 2014. Son of Enron: Investors weigh the risks of Chinese variable
interest entities. Journal of Applied Corporate Finance, 26(3), pp.61-66.
Gracie, C., 2014. Alibaba IPO: Chairman Ma’s China. BBC News, September, 8.
Guldiken, O., Tupper, C., Nair, A. and Yu, H., 2017. The impact of media coverage on IPO
stock performance. Journal of Business Research, 72, pp.24-32.
Guldiken, O., Tupper, C., Nair, A. and Yu, H., 2017. The impact of media coverage on IPO
stock performance. Journal of Business Research, 72, pp.24-32.
Hartog, B., 2016. Post IPO-Performance: A ComparativeAnalysis between the US and China.

14IPO
Havinga, M., Hoving, M. and Swagemakers, V., 2016. Alibaba: a case study on building an
international imperium on information and E-Commerce. In Multinational Management(pp. 13-
32). Springer, Cham.
Kim, Y.C., 2018. Alibaba: Jack Ma’s Unique Growth Strategy and the Future of Its Global
Development in the Chinese Digital Business Industry. In The Digitization of Business in
China (pp. 219-247). Palgrave Macmillan, Cham.
Li, S., 2015, July. Gaining trust: The construction of corporate ethos in Alibaba's US IPO.
In 2015 IEEE International Professional Communication Conference (IPCC) (pp. 1-6). IEEE.
Li, S., 2016. Ethos as Dwelling: The Construction of Corporate Ethos in an IPO.
Li, S., 2017, July. Communicating in new contexts: A case study of a cross-cultural electronic
roadshow. In 2017 IEEE International Professional Communication Conference
(ProComm) (pp. 1-5). IEEE.
Mac, R., 2014. Alibaba Claims Title For Largest Global IPO Ever With Extra Share
Sales. Retrieved from forbes. com: https://www. forbes. com/sites/ryanmac/2014/09/22/alibaba-
claims-title-for-largest-global-ipo-ever-with-extra-share-sales.
Mansaku, I., Mansaku, S. and Tampakoudis, I., 2017. An empirical comparison of the major
stock exchanges: NYSE, NASDAQ and LSE in Perspective. Academic Journal of
Interdisciplinary Studies, 5(3 S1), p.406.
Petry, S., 2014. Founder Firms and Bad Corporate Governance Design? The Case of
Alibaba. The Case of Alibaba (November 24, 2014). FIRN Research Paper, (2530063).

15IPO
Tse, E., 2015. China's disruptors: How Alibaba, Xiaomi, Tencent, and other companies are
changing the rules of business. Penguin.