Introduction

On Friday, September 19, 2014, the Alibaba Group Holding Limited (Alibaba), China’s largest
e-commerce company, came up with largest ever Initial Public Offer (IPO) in human history and
started trading on the New York Stock Exchange (NYSE). Alibaba raised US$25 billion though
the IPO. This IPO surpassed the Agricultural Bank of China’s IPO of 2010, which till then had
been the largest and had raised US$22.1 billion.

After Alibaba’s IPO, the top three largest IPOs in the world belonged to mainland Chinese
companies. In an interview to CNBC , Jack Ma (Ma), founder of Alibaba, said, “Today (on issue
day) what we got is not money. What we got is the trust from the peopleAfter Alibaba’s IPO, the
top three largest IPOs in the world belonged to mainland Chinese companies. In an interview to
CNBC , Jack Ma (Ma), founder of Alibaba, said, “Today (on issue day) what we got is not
money. What we got is the trust from the people.”
The electronic commerce industry or e-commerce industry referred to either the industry which
used the World Wide Web (WWW) for its full business cycle or for one part of it. There were
various types of e-commerce business models. The most common were B2B (business-to-
business), B2C (business-to-consumer), and C2C (consumer-to-consumer) e-commerce. The e-
commerce industry was a relatively new industry, in 2014, when compared to other industries
such as the automobile industry and steel.
Company Background

In 2014, Alibaba was the largest online and mobile e-commerce company in the world in terms
of Gross Merchandise Volume (GMV), which increased from Rmb 1.08 trillion in FY13 to
Rmb1.68 trillion, a growth of about 56%. In 2014, Alibaba had more than an 80% market share
in China’s online shopping market and mobile e-commerce market. This was all the more
noteworthy given the fact that Alibaba’s humble beginnings.

Alibaba was founded in March 1999 by 18 people, including Ma, with a collective fund of
US$60,000 . The company was started at Ma’s apartment in Hangzhou in the Zhejiang provision
of China. On why Alibaba was chosen as the name, Ma said, “The name (Alibaba), taken from
the Arabian Nights, was chosen because it’s universally well known and is easy to spell.” In the
same year, Alibaba launched Alibaba.com, a business-to-business (B2B) English language
marketplace for small exporters, mainly in mainland China, to sell goods to foreign buyers.

In January 2000, Alibaba got an investment of US$20 million from a group led by SoftBank
Corp. (SoftBank). On this investment, Ma said, “The partnership with Softbank will give us a
powerful platform to expand the depth and breadth of our business and deliver further value to
participants in global trade.” In May 2000, Alibaba brought in John Wu, creator of the Yahoo!
Search engine, and appointed him as its Chief Technology Officer. In 2003, company started the
marketplace Taobao.com, a consumer-to-consumer (C2C) market place which later became the
largest shopping destination in China.

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.

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)

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, JD.com , 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 deposit

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