When Will Alibaba Go Public?

 | Jul 09, 2013 | 9:45 AM EDT
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There's an interesting interview this morning in the Wall Street Journal with new Alibaba.com CEO Jonathan Lu. It's his first western interview since taking over the Chinese Internet giant from Jack Ma in May. The question on all investors' minds is this: When will Alibaba go public?

In the interview, Liu said, "We are ready ... anytime." He also said that the final decision on when to "press the button" will be Jack Ma's.

There are persistent rumors out of China that the company -- which many analysts believe will achieve a valuation of $70 billion when it goes public -- will seek a Hong Kong listing in the fourth quarter. Liu said that they were looking at both Hong Kong and New York as "suitable" locations for an initial public offering. But he did say they were more familiar with the Hong Kong requirements, as the old Alibaba.com B2B unit did IPO in Hong Kong in 2007.

The most interesting aspect of the upcoming Alibaba IPO, though, is that it has no incentive -- like Facebook (FB) had -- to maximize the value of this IPO. If Alibaba fully maximizes the value taken from investors, it will have to buy half of Yahoo!'s (YHOO) 24% stake for the same price. So, for example, if Alibaba gets a $100 billion valuation, they'd owe Yahoo! $12 billion for a 12% stake.

Alibaba would be better off achieving an initial valuation of $60 billion to $70 billion and paying a lower price to Yahoo! for the stake and waiting for the stock to move up to do secondary offerings. So, they have an incentive to do an IPO sooner than later, which is why many (including me) believe it will occur this year.

Lu and the rest of the Alibaba management team must be concerned with the Chinese economy sputtering. If, as some bears believe, the Chinese market does crash and Alibaba chooses to delay its IPO, Alibaba might have to wait several months or a year or more before listing.

Even though that might be the sensible thing to do, given market conditions, the value of Alibaba would continue increasing. An IPO next year at this time might mean Alibaba would be worth significantly more -- for Yahoo! shareholders.

The bottom line is even with China bears circling, we will likely see an Alibaba IPO this year, come hell or high water. Alibaba will be better off in the long run, owning that 12% stake at today's value and not next year's.

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