Alibaba Adjusts Valuation, Tightens Partnership Control
E-commerce leader Alibaba is disclosing yet more information on itself and what investors can expect to get in its upcoming IPO, including a revised estimate of its valuation that puts it roughly on par with archrival Tencent (HKEx: 700). The company is also giving more details revealing just how little control investors will have over the company under a corporate structure that will put all management decisions in the hands of a small group of partners. Neither of these revelations is hugely surprising, and instead reflects just how closely everyone is watching an IPO that could be the largest technology offering of all time.
Recent media reports have also indicated that Alibaba’s IPO may be falling behind schedule, and that it may miss its target date for a trading debut on August 8, which has symbolically lucky overtones for Chinese. But anyone who owns company shares is already lucky enough, and many of Alibaba’s longest-serving employees are likely to become overnight millionaires after an IPO that could raise $10-$20 billion.
Among the 2 latest news bits, the most interesting is Alibaba’s own newest estimate that pegs its value at about $130 billion. (Chinese article) That figure is far lower than the estimates of up to $200 billion that some analysts were giving just a half year ago, and is roughly in line with figures of $120-$150 billion that came out around Chinese New Year. (previous post) The number is up from Alibaba’s own previous estimate of $117 billion in June.
To put the figure in perspective, Alibaba’s biggest rival Tencent has a current market value of about $146 billion, up about 10 percent from levels at Chinese New Year. Baidu (Nasdaq: BIDU), the nation’s third largest Internet company, has a current market value of $65 billion, up around 20 percent from the Chinese New Year.
Some observers might note that Alibaba’s market cap appears to be moving downward even as Baidu’s and Tencent’s have risen. But what’s really happening is probably a “settling” of the figure from some previous analyst estimates that were overinflated. Media in past reports also tended to focus on the highest of a wide range of estimates, meaning the consensus was probably always a bit lower than the headline figures being trumpeted in many reports.
So the big question becomes: Where will the final valuation come out at, and who will have bragging rights to the title of China’s most valuable Internet company? I’m sure Alibaba’s fiercely proud founder Jack Ma thinks about this question each night, and is secretly praying to the gods for a valuation higher than Tencent. The battle will be close, and will probably depend on whether Alibaba’s stock rises or falls on its first trading day. If I were betting, I would say the shares could rise slightly on their debut, but that the valuation will still trail Tencent slightly.
Meantime, Alibaba’s latest filing is shedding more light on just how tightly control of the company will stay with its core group of partners after the offering. Alibaba has previously said that a partnership of 27 members can appoint 4 of its 9 board members. Now the latest filing is saying that partnership can appoint 2 additional members without any shareholder approval. (English article) That means the board could ultimately end up with as many as 11 members, and a majority of 6 of those would be directly appointed by the partnership.
This kind of technicality isn’t really that important for Alibaba or any other Chinese Internet company whose shares trade in the US or Hong Kong. Holders of those shares have never had any real control over managerial issues, even if they technically have the right to elect board members. At the end of the day, anyone who owns Chinese Internet stocks realizes that China-based executives are best positioned to run the company and make all big decisions in the tricky market. Any investor who doesn’t like those decisions can sell their stock, which is the only real control that shareholders ever really had.
Bottom line: Alibaba’s valuation is likely to be roughly comparable to Tencent’s after its IPO, while its partnership structure won’t affect its attractiveness to investors.
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