Reasons for Alibaba's IPO and its Impact on the Company

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Business Accounting and finance
Assignment Question
(i) a
Companies like Alibaba conduct Initial Public Offer (IPO) for many reasons and they include the
following:
The need for capital for expansion; companies go public because of the insufficient capital. If the
sources of capital both internal (from families, friends and retained earnings) and external
sources such as from banks or from private entities are not adequate, the only alternative left for
the company that needs money or funds is to involve in IPO (Chordia 13).
An IPO helps a company to increase its capital to finance current and future requirements. The
portion of the capital acquired can be used to settle debts by paying off loans which are due to
maturity. Furthermore, if an IPO is successful, companies can continue raising capital in the
future through conducting seasoned equity offerings which also known as Issue rights in United
Kingdom.

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Also, companies that have engaged in an IPO expect to acquire loans on the better terms in the
market. This is because the company gains good image from the public thus portraying a better
transparency. It becomes easier for the company to borrow on better terms in the market after it
has conducted an IPO.
Companies wish to conduct IPO in order to acquire employee compensation. Most firms believe
that by offering employees shares with a market price in the company, this helps the employees
to work hard. Such motivation helps the firm to remain with high quality staff. For example,
when Money supermarket went public in 2007, this helped the company by retaining the staff
and also improved the success of the business (Chordia 10).
In addition, when a firm goes public, the visibility and its image in business are maximized. This
helps to bring a competitive edge than those competitors which are not listed. In most cases,
when a firm is depending on its self, it faces a challenge of limited capital which can alter to their
expansion. For the companies which have conducted IPO, make them easier to understand the
potential acquisitions of the company.
Furthermore, when the firm conducts an IPO, company’s founder owners benefit (Grocer 5). A
company that has gone public gets opportunities for the entrepreneurs to sell off their belongings
in the company. This helps them to consume capital which is tied up in the company.
However, going public also has got some disadvantages to the firm and these include:
Adherence of strict laws; when the company goes public, the company adheres its information
transparently. This leads to the board structure and the company’s private information to be
revealed to the public. The company has to disclose its obligations once it lists its name as IPO in
order to give relevant information to the regulators and the stock exchange.

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Costs money and time; when the firm goes public, a lot of money and time is ejected. This gives
relevant information to the competitors of the firm. This hinders the company’s share price.
Also, going public creates a gap between owners of the firm. The governors of the firm elect the
directors who also appoint the acting managers to run the firm on a daily basis. This incidence
leads to the emergence of underrating the management’s decisions of the owners of the firm.
Also, going public increases the visibility of the company. This means that there is the
emergence of hostility of owners to takeover in the business, this in turn brings bad image to the
stock exchange market or to the public.Lastly, it is expensive to conduct an IPO. Since the
process of conducting an IPO is time consuming, managers or owners tend to incur a lot of
funds. By incurring a lot of funds, this hinders their financial interests in the business
(i) (b)
Alibaba went public purposely to create the compete for acquisition and to launch new products
in the country. Alibaba entered into IPO to out compete in order to be the leading company than
its competitors and operate anywhere. These competitors include; Tencent and Baidu Inc. Also,
Alibaba wanted to rise its funds so that it could expand its ownership among the large group of
ownership.
(ii).Alibaba raised capital from the stock markets overdebt because; with stock markets, the
owners of the firms can control the combined public trading firm. Also, with stock markets its
less risky because there are no fixed monthly payments as it is in debt financing. The control or
management of Alibaba under the stock exchange was very easy since it wanted to expand the
shares all over the world using online. Alibaba wanted to increase the wallet shares of its buyers,
expand categories and offerings and also extend their mobile leadership.

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Alibaba choose to list on New York Stock Exchange (NYSE) because of the following
reasons:
Control; this was among the reasons as to why Alibaba listed with NYSE. The founder of the
company (Jack Ma) wanted to maintain the control of the company. NYSE in US allows
companies to shares classes to maintain public traded companies control. NYSE does this to the
foreign companies to hold the majority of shares and gives an opportunity to raise capital.
Reputation; there is plenty of prestige in being a listed member of New York Stock Exchange
market(NYSE). There is also the advantage that, companies listing with NYSE face a regulatory
supervision of the stock exchange commission (SEC). NYSE pays the investors with the main
aim of increasing transparency of the listed company in the future.
Motion range; listing with the NYSE helps Alibaba company to access more mergers and various
acquisitions. When a foreign company lists with another foreign stock exchange market like
Alibaba in United States, everyone notices that a new company has emerged in the market. This
puts the company to broaden its customer base.
The bottom line; Alibaba could have listed with the NYSE because of keeping control of the
company. NYSE promotes the listed company’s image and the advantage of mergers and
acquisition (M&A) activity.
(iii). Alibaba estimates that it will use its net proceeds after removing the underwriters discount
and commissions. The company wishes to use its shares from the offerings for general corporate
purposes. Once the proceeds and shares are mismatched or mishandled, the company will face
disputation from the public thus spoiling the image of the business.