Alibaba, HKEx Spar Over IPO Terms

Alibaba bargains with HKEx over control issues

An interesting war of wills is shaping up between the Hong Kong stock exchange (HKEx) and e-commerce giant Alibaba, which looks increasingly determined to make its highly anticipated multibillion-dollar IPO in Hong Kong rather than New York. Alibaba’s apparent determination to keep its listing closer to its home China market is understandable, since the Hong Kong stock exchange is already home to China’s biggest listed Internet company, Tencent (HKEx: 700). But that said, Alibaba’s only personal experience with a public listing was also in Hong Kong, and that listing involving its B2B unit was largely a failure. Shares of initially soared after their 2007 IPO, but then were largely ignored by investors due to slowing growth, prompting Alibaba to ultimately privatize the company last year.

My prediction is that Alibaba will ultimately make its IPO in Hong Kong, though founder Jack Ma will continue to keep his options open to pressure the HKEx to give him what he wants. According to the latest reports, the biggest issue now for Alibaba is all about control. The reports say Alibaba wants to issue 2 classes of shares, in a bid to let Ma and other early Alibaba investors and managers retain more control of the company. (English article)

The creation of multiple classes of stock used to be relatively common, allowing managers and early investors to retain oversight of their companies by holding preferred stock while selling ordinary shares to minority investors. Such ordinary shares typically carried much less voting rights than preferred shares, even though the cost for both was roughly the same. In recent years where transparency and minority investor rights have come into focus, such dual-share plans have become less popular.

The latest reports say that despite the Hong Kong securities regulator’s strong distaste for such dual class listings, Alibaba wants to go ahead with just such a plan. The report quotes a banker saying the Hong Kong regulator is unlikely to approve such a plan, however, and that Alibaba may need to use a more subtle approach to meet its control objectives.

As I’ve said above, all of this looks like posturing to me for Alibaba to get the best possible terms from Hong Kong for making its listing on the HKEx. Despite the disappointing performance of, I personally agree that Hong Kong is a better place for Chinese Internet firms to list, even though New York is currently host to far more Chinese web companies like Sina (Nasdaq: SINA) and Baidu (Nasdaq: BIDU).

Most importantly, most investors in Hong Kong are already familiar with big names like Alibaba and realize what a powerful brand and player it is because they read about it all the time and often even use its products and services. By comparison, the average US investor mostly knows names like Alibaba and Sina by reading analyst reports, as none of these Chinese companies has much of a presence outside Asia. The meteoric rise of Tencent’s stock, which has jumped nearly 100-fold since its 2004 IPO, reflects not only the company’s own huge success, but also the fact that its shares trade in Hong Kong where investors are quite familiar with its name.

At the end of the day, I would be willing to bet that Alibaba’s IPO will almost certainly happen in Hong Kong, placing the odds at 80 percent or higher. Ma’s desire to retain control for himself and other early investors is certainly understandable, especially after his bad experience after yielding big control when US Internet giant Yahoo (Nasdaq: YHOO) purchased 40 percent of his company in 2005. At the end of the day I do think he and the HKEx will reach a compromise on the control issue, and that the long-awaited IPO could come in Hong Kong by the end of this year.

Bottom line: Alibaba’s current negotiations with the HKEx reflect its strong desire to list in Hong Kong, which is almost certain to host the company’s multibillion-dollar IPO.

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This article was first published in the online edition of the South China Morning Post at

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