Business Accounting & Finance: Case Study Analysis of Alibaba's IPO

This assignment provides a comprehensive analysis of Alibaba's Initial Public Offering (IPO), addressing key aspects such as the motivations behind going public, the choice of raising capital through stock markets over debt, and the decision to list on the New York Stock Exchange (NYSE). It examines the planned use of IPO proceeds, the accuracy of the reported $21.77 billion raised, and the implications of Alibaba's partnership structure and Variable Interest Entity (VIE) arrangement. Furthermore, the assignment delves into the roles and factors to consider when selecting an underwriter, as well as the motives for syndication in Alibaba's case. It critically assesses the pricing of Alibaba's American Depositary Shares (ADS) at $68, providing a holistic view of the financial and strategic decisions surrounding one of the most significant IPOs in history. Desklib provides access to similar solved assignments and study tools for students.

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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.

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Alibaba should invest IPO proceeds in debt instruments other than investing it in bank deposits.
This is because Alibaba is a foreign company in US. Alibaba will not receive any proceedings
from the sales of American depositary shares(ADSs). Alibaba will get some difficulties in
professional regulation commission (PRC) in case it invests its capital into deposit banks.
Investing in debt instruments allows the company to have full control over the business. Also,
the company will use the debt to acquire capital either to get loans or to issue bonds. The
company of Alibaba will raise its financial status by the use of debt.
Furthermore, Alibaba should invest IPO proceeds in debt instruments because debt securities
provide the good side of the company to increase its funds and investors through purchasing the
debt. PRC registrations and government requirements of approval under the deposit markets are
high more especially on the foreign companies.Alibaba should invest its capital shares in debt
instruments since the returns of bonds are relatively higher than those of interest that it could get
from the deposit banks through the saving accounts.
(iv)
It is very correct to state that Alibaba raised $21.77 billion through its IPO. Initial public offer
(IPO) from Alibaba group raised the total for all United States IPOs in 2014. Such an incidence
with the highest level of IPO was there some decades ago. The company (Alibaba) put up a
record with the $21.77 billion. Such record was from raising sells of the shares to the public.
Alibaba made a record in that it exceeded the offer made by Visa(V) in 2008 and General
Motors(GM) in 2010. It is true that Alibaba can even perform better than the record it put by
itself. This can be done if the underwriters of the company intentionally sell the maximum

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shares. If the proceeds are raised by the company of Alibaba, it can even bypass the Bank of
Agriculture in china IPO set by the world’s ever record in shares or capital.
(v)
Alibaba company since it was founded by Jack Ma in 1999, it has been working in the team of
partnership (Ishak and Haliah 10). Partnership is viewed as the company’s culture and the key
point for is success to serve their customers, adhere to employees and to deliver the valuable
services to the stakeholders. The company believes that, partnership approach helps them to
manage the business better. Alibaba partnership helps the company to strengthen itself through
admission of new partners every year since there is no limit on entry. Also partnership approach
helps the partners to agree on priorities of guidelines to be amended, nominations and elections
of partners.
Alibaba also used the Variable Interest entity. VIE refers to the term commonly applicable in the
financial standards board of US. VIE is a legal structure of the business by companies to create
ownership. In 2014, Alibaba was ranked as the highest investors in IPO, this attracted the
interests of other e-commerce companies. The VIE structure of the company is about trust indeed
of the company. This limits the foreign ownership in the business as a requirement of the
government.
The nomination and election procedures would affect the entry of new investors. In Alibaba
company, a partner is to be nominated after fulfilling the requirements. These requirements
include; one should be among the continued member of Alibaba company, should possess The

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Small and microfinance services for the company over beyond four years, among others. These
restrictions affect the entry of new investors in the Alibaba group.
(vi)
(a).There are several key tasks executed by the underwriter. Among these include;
Guarantee and Insurance; the underwriter provides a guarantee to the company. This is done
through selling the quantity of stock the process of IPO. If the underwriter fails to tress out the
possible investors to buy the shares, then the company must buy the shares its self.
Financial specialist; the underwriter in an IPO process helps to analyze the finances of the firm.
The underwriter ensures that, the firm fulfills all the regulatory requirements.
(b).
There several factors to consider when choosing an underwriter. These include the following:
A good underwriter should be in position to understand what the company does. The underwriter
should also adopt with the company’s strategies and the way how it operates. Also, the
underwriter should be able to tell the company’s story. This can be attributed by valuing and
creating strong market receptions
An underwriter should be with a good reputation and experience over the company’s strategies
and works. The underwriter should consider the offerings done by the institution in the business.
furthermore, an underwriter should be with the overall quality of the team. The underwriter
should be in position to match up with the expectations f the members in the company. Also, the
underwriter should be with a good personality. The personality of the underwriter is the key
factor for the success of the business.

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(C)there are various motives for syndication in Alibaba company. These may include the
following:
Firm offering; it is one of the motives for syndicate in Alibaba company. Firm offering has the
objective to sell off securities in the prospectus. This helps the firm to share the obligated
motives to break the load of securities for the company.
Buy recommendations; with this, the company is attributed to buying recommendations for the
multiple analysis of the IPO. Also, the standards of indemnity language motivate the syndication
of the company.
(vii) The price issue of Alibaba ($68) per ADS are too high. I would not have invested in the
Alibaba because of the high ADS for new investors to invest. If companies decide on raising
more capital in the market, it should issue more stock in order to get cash to be used in the
business. When the company go in public, trading shares in the open market are attained. Also,
when he market price of shares is relatively affecting the buyers and sellers, the reputation of the
company will be promoted since the public desire a fall in discount.
When the company raises its capital, the share prices fall and the only alternative is to raise
capital focusing on the right issues. The owners and the co-owners face it difficult to engage in
the business. Alibaba cannot operate for so long in the business when it has a reduction stock
prices. So as accompany, raising price issues help the company to operate for long in the
business.
(Viii)

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Basing on the diagram provided, the Alibaba shares in 2014 were $68, the shares of Alibaba
dropped in 2015. This could have been caused by the technical weaknesses and poor forecasts by
the statisticians of the company(Steger 11). The previous empirical reviews talked about the
performance of Alibaba company. The reviews implied that, the shares of the capital increase all
years in and out. During short term analysis, the company increases its shares than the long term
performances.
short-run underpricing and long-run underperformance of IPOs
Long term performance involves the negative abnormal returns of IPOs accoutered in their first
years of listing. Alibaba in 2010 under performed in relation to the firm issues. Alibaba owners
urged that Alibaba IPOs is issued fairly priced in the long term and relatively underperforms to
the market index especially in short term performance.
(ix)
Basing on the pecking order theory, this considers the sources of finances either from internal or
external. The board initiated the capital prices through shares. The business of Alibaba company
has evolved to take place for various years.
(i).The revenue of the company keeps on growing since 2014 up to 2017. The annual report of
2017 shows that, the income from incentives increased with 88% of year and again. The
company performance is attributed by various factors and these include; the increase of annual
buyers on Chinese market places, economic climate, news and rumors about the stock price
activities and many others (Steger 8). Cloud computing was the leading contributor of Alibaba’s
revenue in 2017. Also, Alibaba laid a foundation to attain a growth in long term, it further
acquired its capital from the digital media and entertainment. Technology services in commerce

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led to the increase of Alibaba capital or funds on merchants. With the increasing technology in
Alibaba, millions of customer inquiries can be handled.
(ii).From the graph provided, the long term performances are attributed by many reasons. Mostly
from September 2014 to September 2016, there was a continuous decrease of Alibaba share price
performance. This could have been attributed by different factors such as the supply and demand
of the stock prices. Each and every buyer or seller agree on the price in the market.

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Sources cited
Chordia, S, P. Financial Markets. The Journal of Financial Marketspublishers. (2010).p5-18.
Retrived from https://www.journals.elsevier.com/journal-of-financial-markets..
Grocer, S. Alibaba’s IPO Filing. Alibaba Group HoldingLtd. (2014).p6-20.Retrieved from
https://blogs.wsj.com/moneybeat/2014/05/06/alibabas-ipo-filing-everything-you-need-to-
know/ accessed on 29,2019.
Ishak,H., Haliah, Harryanto, K. Stock Market#2018.Financial Markets. (2019). p3-15.Retrieved
from.https://www.omicsonline.org/scholarly/stock-market-journals-articles-ppts-list.php
Steger, I. Advertising Blitz. Hong konginvestment bankers. (2011).p8-11Retrieved from
https://www.wsj.com/articles/SB10001424052702304563104576355083908481652.