Chinese tech-company giant Alibaba filed papers this week to go public in New York. Since this news is at the intersection of three sexy topics – tech companies, large amounts of money, and the general sense that anything big and China-related must be a unique threat/opportunity – there has been a lot of reporting on the company’s planned initial public offering (see, e.g., here, here, here).
Alibaba is an enormous company. Estimates of its value range from $100 billion to $235 billion, in the ballpark of American Express to AmEx plus Amazon. The company is arguably even “bigger” if you consider it in terms of reach rather than economic value. As Zach Karabell put it in Slate, Alibaba is “a behemoth in China that acts as an Amazon, PayPal, and UPS all rolled into one, plus a dollop of Facebook and other social network sites.”
I have three observations about what the Alibaba IPO might mean for U.S. equity markets, Alibaba’s plans, and Yahoo, which owns a 24% stake in Alibaba:
1. Despite various headwinds, U.S. equity markets continue to dominate. Specifically, U.S. markets continue to be the destination of choice for many global companies – which now includes China’s most ambitious tech company as well as many European tech companies – looking to raise capital. As the chart below indicates, it’s not even close; Alibaba is just the latest data point. This observation cuts against two common memes: one about the putative burden of U.S. regulations, the other a generally overstated point about the declining relevance of the U.S.
- Every time U.S. securities regulation expands, there’s an immediate objection that the costs of regulation will drive companies overseas – either they’ll reduce their U.S. presence or they’ll choose to list on an exchange in a jurisdiction with more lax securities laws. Most recently we have seen this argument during the debates over Dodd-Frank, but it comes up a lot. It was prominent during debates over Sarbanes-Oxley, and it colors discussions of America’s accounting and anti-corruption regimes (GAAP and the FCPA, respectively), which are among the most stringent in the world.
- I don’t think anyone disputes that these forms of regulation have the potential to chill capital formation in the U.S. to the point of sending it abroad. A serious effort to measure the tradeoffs would require a data-intensive study in itself (not a blog post), but it’s worth emphasizing just how competitive U.S. capital markets continue to be. To date companies, including foreign companies, have continued to come to market in the U.S., opting into those onerous U.S. regulations. Although it would be nice to find more longitudinal data (this only covers two years), you can see from the table below that U.S. equity markets continue to dominate (PDF) the world – in 2013, they accounted for about one half of the total value of the planet’s top ten stock markets and are at least holding their own from 2012-13:
- This is probably because American equity markets offer network effects and other competitive advantages that no other market can match. As Karabell argues, U.S. markets are better positioned “in terms of complexity, liquidity, and transparency. . . [If] you are almost any company of size doing business anywhere in the world, the United States remains a safe and potent place to raise capital.” (This has been true for as long as anyone reading this post has been alive.) Our sophisticated regulatory framework is integral to that competitive advantage.
- One caveat to this point is that right now U.S. equity markets are likely benefiting from the perception that they are safe and stable relatively speaking, and offer shares denominated in the world’s reserve currency. Modest growth in the U.S. paired with elevated economic and political risks abroad would appear to favor issuing in the U.S. at the moment. It will be interesting to see what happens to the U.S. share of the global public equity market if/when economic conditions normalize and some of those political tensions ease. But it’s also not clear the U.S. will lose this advantage anytime soon, since there are always economic and political tensions.
- In Alibaba’s case, it has also been reported that the company’s unique ownership structure means it could not list in Hong Kong. If that’s true, the U.S. may have an additional competitive advantage on that point, though it seems likely that other factors also drew them to New York.
2. Alibaba’s F-1 registration statement tells us very little about the company’s plans. There’s been Talmudic scrutiny of this filing, as if the true intentions of the company are now hiding in plain sight, just waiting to be divined by someone with expertise in legal and financial jargon. This places far too much weight on the F-1, which is a basic disclosure document that must be filed by any foreign company issuing securities in the U.S.
- Quartz ran an article yesterday headlined, “Alibaba isn’t going global – at least not yet,” that exemplifies this practice. Analyzing the F-1, the author emphasized that in that document “Alibaba framed its growth prospects in terms of only the Chinese market. . . In fact, Alibaba doesn’t list eBay or Amazon in its list of competitors, naming only Chinese firms,” and regarding the proceeds of the offering it only states they will be used for “‘general corporate purposes’ and short-term debt instruments or bank deposits.” From this the author concluded that “it’s not apparent that funds from the listing will go toward international expansion.” Elsewhere we see bald assertions that Alibaba really has its eye on the Chinese market.
- To the extent these comments are based on the registration statement, they are overblown. These disclosures are designed to satisfy the relatively limited requirements of the Securities Act of 1933, not tip the company’s hand.
- So why else are they raising money? Beyond the usual reasons – raising more capital than is feasible as a private company, allowing early investors to cash out – I have no idea. However, it’s worth noting that being a U.S.-listed company may make it a little easier for Alibaba to do a few things. One is acquire other American-listed companies that offer services in the U.S. that Alibaba offers in China, on the basic principle that deals among firms that share regulators and an investor base tend to implicate fewer regulatory and other concerns than pure cross-border M&A. Given the enormous size and diversity of Alibaba businesses, that is potentially a lot of U.S. companies – eBay, maybe, but a lot of smaller ones too. It would be idle speculation on my part if I said I thought they were going to do some big acquisitions in the U.S., but the limited “use of proceeds” they declared in their registration statement certainly does not mean they are not going to. There is nothing nefarious or Trojan Horse-like going on here; it’s an issue of reading too much into registration statements.
- Bottom line: to understand Alibaba’s F-1 statement to the point of drawing conclusions about the company’s growth strategy, you’d have to have a lot of knowledge about Alibaba, its current competitors, and the industries it could plausibly enter. I suspect few journalists poring over the statement can clear that bar (I certainly can’t).
3. What will happen to Yahoo stock and Yahoo CEO Marissa Mayer’s reform efforts once Alibaba goes public?
- Currently, Yahoo owns 24% of Alibaba, and the value of Yahoo excluding Alibaba is probably less than zero – about negative $3.45 billion by one calculation. For years now, Yahoo stock has partly served as a vehicle for owning an indirect piece of Alibaba’s explosive growth in China. Soon, anyone interested in buying into Alibaba will be able to do so directly, and it’s been reported that Yahoo will sell around half its stake in Alibaba after the IPO anyway.
- It’ll be interesting to see what impact all this has on Marissa Mayer’s efforts to overhaul Yahoo. Those efforts have generally been well received by Wall Street to date. With Alibaba contributing much less to Yahoo’s top line in the future, will she have less freedom of action (because revenues are down) or more (because revenues are down)? Even more intriguing, maybe she’ll find some really neat way to put the proceeds of the sale to use (one-up Tesla CEO Elon Musk’s hyperloop idea?). But based on what she’s been doing, we’ll probably see a boost in dividends and buybacks instead, and maybe an acquisition or two.
My thanks to Chris Gaskill, who has advised companies on IPOs as outside counsel and has worked in house at two public companies, for his thoughts on these subjects. As always, all opinions are my own.