Alibaba decides to pursue a US listing

The Chinese e-commerce company gives up on a Hong Kong IPO after failing to reach a compromise with local regulators on structural issues, sources say.
In a blog published on Wednesday afternoon, Charles Li, HKEx CEO, noted there were numerous ways to look at the questions of investor protection.
In a blog published on Wednesday afternoon, Charles Li, HKEx CEO, noted there were numerous ways to look at the questions of investor protection.

Alibaba Group, the Chinese e-commerce company, is seeking to go public in the US after it failed to reach a compromise with the Hong Kong stock exchange regarding a listing there, a source said on Wednesday.

After a period of seemingly intense discussions, the source said Alibaba felt it had come to an end of the dialogue with the Hong Kong Exchanges and Clearing (HKEx) and had started preparations for an initial public offering on either the New York Stock Exchange or Nasdaq instead. It has already hired a US law firm and will be mandating investment banks shortly, the source added.

The company’s decision means that Hong Kong will miss out on the most anticipated internet-related IPO since Facebook and one that looked set to become the largest new listing on the Hong Kong stock exchange in more than three years. Bankers expect the company to raise as much as $15 billion, possibly even more, which would have been highly welcome for the exchange after a decline in the volume of new listings so far this year.

The fact that the HKEx was prepared to let that go surprised some Hong Kong-based investment bankers, but it seems the exchange felt it was more important not to compromise on its existing listing rules.

The issue that has been under discussion is that Alibaba’s management, led by its founder Jack Ma, wants to be able to keep control of the company after the listing so that it can continue to impose its long-term vision for the company.

One way to do that for companies that have a diversified shareholding structure already before the IPO is to have two classes of shares with different voting rights. That way, the founders can retain control even though they do not hold a majority of the economic interest. This is common among internet companies in the US and is used by both Facebook and Google.

Alibaba is currently 37% owned by Japan’s Softbank, while Yahoo owns about 24%. Other large investors, including Temasek and China Investment Corp, also hold significant stakes following two financing rounds in the past couple of years. Ma and other company executives own about 10%.

Hong Kong does not allow a dual-share structure, however, and it seems Alibaba accepted quite early on that the exchange would not make an exception on that particular issue, even for the world’s largest e-commerce company. Instead, it proposed a structure whereby Alibaba’s partners would be nominating the majority of the board members.

Frequent leaks to the media in recent weeks has suggested that the Hong Kong exchange was not keen to accept this either, while sources have said that Alibaba was not about to give in on its demand to keep the management in control.

Ma explained the thinking behind the partnership system and why he wants the partners to retain control of the board of directors in a recent letter to staff, saying: “We hope the partnership system can shield the company’s long-range development plans from the short-term profit seeking trends of the capital markets.”

Neither Ma, nor anyone else at Alibaba has publicly said that the company would prefer to list in Hong Kong. In fact, they have maintained all along that they were keeping their options open and had not made a decision about where to go public. However, the discussions with HKEx and the fact that Alibaba offered a compromise related to the board nominations, suggest that Hong Kong was high on the list of choices.

Key reasons for that are believed to be the proximity to its customers and the fact that Tencent has done very well as a Hong Kong-listed company. The company’s business-to-business trading platform,, was also listed on the Hong Kong exchange between 2007 and mid-2012.

The company, which was founded by Ma and 17 others in 1999, currently has 28 partners. They include Jonathan Lu, who replaced Ma as CEO in May this year, and Joseph Tsai, who was chief financial officer until earlier this year and is now executive vice chairman. Ma himself, as the executive chairman, is still deeply involved in the strategic development and growth of Alibaba’s many individual businesses and the group as a whole.

With a large portion of Hong Kong-listed stocks held by retail investors, Hong Kong is keen to safeguard the rights of minority shareholders, and it is not the first time it has declined to make waivers for a dual-share structure. Manchester United briefly considered Hong Kong as a listing destination before it turned to Singapore and then ultimately to the US because it was not allowed two classes of shares in either of the Asian markets.

Alibaba’s pending IPO is much larger though and, given that it is one of the top-three internet companies in China, alongside Baidu and Tencent, many observers had thought that the exchange would find a way to accommodate its listing. The company’s two major shopping platforms, and Taobao, had combined revenues of more than Rmb1 trillion ($159 billion) last year, and the company’s overall profit tripled in the second quarter this year, from a year earlier, to $669 million.

In a blog published on Wednesday afternoon, Charles Li, HKEx CEO, noted there were numerous ways to look at the questions of investor protection, share structures and voting rights and said he welcomed an honest, balanced and respectful debate on the topic.

“We need to look objectively at the issues and not be swayed by emotional arguments or be distracted by specific circumstances of any given company or issue,” he said, and then outlined a number of different viewpoints in the form of a dream featuring Mr Tradition, Mr Innovation, Mr Disclosure and Ms Future, among others.

Li did not mention Alibaba by name but the fact that he chose to publish the blog on the very same day that stories emerged saying the company was turning to the US was clearly not a coincidence.

He did not give his own opinion on the issue but the fact that the voices advocating change came towards the end of the blog did suggest that this is the way he is leaning. And perhaps the fictional input by “Mr Process” sums up the current situation the best:

“Hong Kong’s listing rules are clear and, if there is a need to change them, we should do it via due process. If we chop and change our regulations to fit whoever comes along we will lose all credibility… If a company is asking for something narrow, modest and balanced that can be reasonably dealt with within the letter or the spirit of the overall listing regime as it currently stands, waivers or permissions can be allowed.”

“If what is asked for is beyond this narrow space of discretion permitted under the rules, however,” Mr Process continues, “then such significant changes to the rules and policies should be adopted only after proper consultation with the community so that they will stand the test of time.”

So, perhaps the HKEx and its listing committee could have been convinced to allow a differentiated voting structure. After all, the market has the option of pricing companies that adopt such a system at a discount if it is worried about shareholder protection. But, as suggested in the blog, to make that change would take time. And in the fast-moving internet world, that was time that Alibaba simply did not have.

¬ Haymarket Media Limited. All rights reserved.
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