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Alibaba Case Study

Alibaba was founded in 1999 by Jack Ma and has become China's largest e-commerce company. On September 19, 2014, Alibaba went public on the New York Stock Exchange in the largest IPO ever, raising $25 billion. Due to restrictions on foreign ownership in China, Alibaba uses a Variable Interest Entity structure, where it conducts business through subsidiaries and variable interest entities owned by Chinese citizens.

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Ahmed Refaat
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160 views

Alibaba Case Study

Alibaba was founded in 1999 by Jack Ma and has become China's largest e-commerce company. On September 19, 2014, Alibaba went public on the New York Stock Exchange in the largest IPO ever, raising $25 billion. Due to restrictions on foreign ownership in China, Alibaba uses a Variable Interest Entity structure, where it conducts business through subsidiaries and variable interest entities owned by Chinese citizens.

Uploaded by

Ahmed Refaat
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Organization overview:

The founder and chairman of Alibaba is Jack Ma, he established and launched the business in early 1999 from his small
apartment in Hangzhou. Alibaba is online platform that allowed small and medium sized Chinese manufacturers interact
with international buyers. Basically, Alibaba made it much easier to find and communicate with the manufacturers of a
ventures product. Chinese and foreign companies knew very little about the Chinese suppliers making them reluctant to
risk funds transacting with strangers. Alibaba bridged this gap; this substantially increased the amount of trust between
firms and manufacturers, therefore increasing the profit found on both sides.
On 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

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

Alibaba Main Competitors


Below we listed the top 3 main competitors for ALIBABA:

1- Amazon. 2- Jingdong (JD.com) 3- Walmart


SWOT analysis:

Strength Weakness
Alibaba is not putting a cap on the number of
Large scale of operation in market.
sellers.
Limited International presence, China was the
Alibaba had a market share of 58% in China.
main market.
Great Leadership.

Opportunities Threats
International expansion Overall rising competition

Technological innovation Legal threats

Digital marketing

International partnerships and acquisitions

Business model:
The below shows the summary of Alibaba business canvas:
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 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.

That 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 great 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.

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