The Alibaba IPO

Case Details Case Introduction 1 Case Introduction 2 Case Excerpts

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Corporate Structure Of Alibaba

In China, foreign ownership and foreign investment in various businesses, including value-added telecommunications services, the internet, etc., was restricted by law. Variable Interest Entity (VIE), a complex investment vehicle, was the solution to foreign ownership and investment restrictions.

VIE was the common structure for companies that operated in China but owned by people outside China. There were around 10 Chinese technology companies which were listed on the NYSE and all of them used the VIE structure. In 2014, Alibaba was a Cayman Island holding company established in 1999, although it was based in China. Alibaba conducted its business in China through its 290 subsidiaries and Variable Interest Entities. Ma was the majority holder in these VIFs.

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IPO Issues Details

Alibaba offered around 320 million American depositary shares (ADSs), which were equal to around 320 million ordinary shares, with a par value of US$0.000025 per share. These ADSs of around 320 million included around 197 million ADSs held by various shareholders including Yahoo, Jack Ma, and Joe Tsai . The company set the offer price at US$68 per ADS which made an offer worth US$21,767.21 million (US$21.77 billion) (Refer to Table II)......

Objective Of The IPO

Alibaba had planned to use the net proceeds from the issue for general corporate purposes, to create a war-chest for acquisitions and for new product launches to compete with its home country competitors such as Tencent, , and Baidu Inc. . The company also planned to expand outside its home country, especially in the U.S. Alibaba intended to invest any pending net proceedings in short-term interest bearing debt instruments or bank deposits....

Pricing Of The IPO

According to the prospectus, Alibaba had set the price through negotiations between the company and representatives of the underwriters. Alibaba also considered historical performance, market conditions, future earnings projections, business prospects, management quality, and market valuation of other companies in the same businesses.....

Issues Related To The IPO

Alibaba’s VIE structure was a concern for investors as under the VIE structure, any investor who bought stock in IPO did not actually own Alibaba. They owned a share in a holding company registered in the Cayman Islands with a claim on some of Alibaba’s profits but with no direct ownership stake. As investors did not own Alibaba directly, they had no voting rights. However, the investors would get a share in Alibaba’s profits. ......

The Big Day

On September 19, 2014, Alibaba’s shares started trading under the ticker name ‘BABA’. The first trade executed at US$92.70 per share, well above the IPO price of US$68. Within a few minutes of opening-trade, the share price had gone up to US$99 per share. By the end the day, the share price closed at US$93.89, which was 38% up from the offer price.......

Delivering On Expectations

Alibaba was not well known outside China before this mammoth IPO. However, after the successful IPO, it joined the elite club of world renowned tech companies with its high market capitalization. At the end of October 2014, the company’s shares were being traded at 45.41 Price to Equity (P/E) multiples, which was significantly higher than the P/E of S&P500 (Standard & Poor’s 500) which was 19.33 for the same period.......


Exhibit I: B2C e-commerce Sales Growth of Selected Countries in 2014
Exhibit II: Selected Financial Information of Alibaba Group Holding Ltd
Exhibit III: Demographic Trend of China
Exhibit IV: Expenses Related to This Initial Public Offer