Alibaba IPO in the Works

 | Sep 25, 2013 | 9:50 AM EDT  | Comments
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News broke overnight that Alibaba is coming to America for its initial public offering.

Anyone paying attention has noticed that the company has been in prolonged discussions with the Hong Kong Stock Exchange over the past two months, attempting to gain concessions regarding how its shares would be listed in Hong Kong. Alibaba has wanted essentially a dual-class share structure, similar to that of Google (GOOG) or Facebook (FB). This would allow management to keep firm control over the running of Alibaba, even though CEO Jack Ma and the rest of the team only own 10% of the company today.

Americans wouldn't bat an eye at such a request, as they're accustomed to this kind of desire for control from top Internet firms. However, in Hong Kong, dual class shares haven't been allowed since 1987, after the practice was overly abused there to the harm of minority shareholders.

Nevertheless, Alibaba tried to push for a "special exemption." This would have given management total control of its company on an exchange in the company's own backyard, instead of on the other side of the world. Most important, the firm wouldn't have had to worry about class-action lawsuits from American lawyers over such matters as counterfeit goods available for sale on Taobao. It also wouldn't have needed to allow the SEC and other accounting bodies to have purview over the company's operations.

The Hong Kong Stock Exchange -- itself a profit-seeking enterprise -- and the local Hong Kong banks would have loved a piece of a $15 billion IPO. But it was obvious to all that, if it had made an exception for Alibaba, every other IPO to come after it in Hong Kong would have wanted the same treatment. It would have been a slippery slope. So Hong Kong stood firm.

As a result, Alibaba has now turned to New York. Given all of the recent Nasdaq tech problems, I would imagine the company will list on the NYSE instead, but we will see. Alibaba has every chance of being a bigger IPO than Facebook's last year, so the management team would not likely want to risk the Nasdaq being flooded with orders again.

At different points in the process, Alibaba has leaked to the press that it has considered delaying its IPO until 2015. It's been a negotiating ploy to try and get the terms it wants, or else take its ball and bat and go home. But that threat was never realistic. The longer Alibaba waits for an IPO, the more the value of its enterprise increases.

That matters because, whenever Alibaba debuts, it will have right of first refusal on buying back 12% of its company from Yahoo! (YHOO). Of course, given that the management "only" owns 10% of the company now, they'd be fools not to buy that stake. But would they rather buy that stake now at an $80 billion valuation or in 2015 at a $200 billion valuation? It's easy math.

Therefore, expect an NYSE IPO of Alibaba before Thanksgiving.

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