China's Ali Baba: The $100 Billion Internet IPO That Might Not Be

The biggest thing since...Facebook? They sure hope not. Ali Baba, the Chinese internet behemoth was thinking its IPO would have people asking Facewho?

That's part of why they insisted on what observers are calling a 'creative' or 'fascinating' management structure. It proved a tad too interesting for the Hong Kong exchange, but US exchanges, desperate for revenues and to proclaim their decaying claim as the center of the world's capital markets had no problem with the proposal that would permit management to retain control despite its putative emergence as a public company. Happens all the time; what could go wrong? Indeed.

That virtually all of the companies the US Securities and Exchange Commission is in the process of de-listing are Chinese companies with questionable accounting and legal problems will almost certainly not stand in the way of a big payday for the financial services industry. And the company's two biggest investors, Japan's Softbank and America's Yahoo have enthusiastically supported Ali Baba's position versus the Hong Kong exchange. And why not? Yahoo, still struggling to survive, stands to make a very cool $7 billion if Ali B goes public at the $100 billion valuation many bankers are touting. The company, however, recognizes that while that big round number will probably generate lots of 'me-too' activity and make it a great year for Wall Street bonuses, it understands that as ego-enhancing as that number may be, it could be problematic in the long run. See Facebook IPO, expectations versus reality. But hey, $100 billion vs $70 billion, the more 'modest' number the company is considering? Whatever. Wake us up when we start talking real money.

But, ahem. As exciting as all this talk may be, there is one teensy-weensy little problem: the Chinese government. Yeah, those guys. Seems that Ali B has been collecting massive amounts of personal and economic data on China and its citizens. Which was fine when the company was private and not required to release anything it didnt want to. But the Chinese leadership are letting it be known that they are not thrilled with US regulatory oversight that might make it imperative that such data be revealed to support securities analysts' projections...to say nothing of regulators' curiosity. Hong Kong, therefore, might be a more satisfying location for the people who actually call the shots. As you may have noticed, they like control. So the trade-off between more control and more stock price appreciation will be the axis along which this decision will probably be made. JL

Sri Jegarajah reports in CNBC:

Highlighting the firm's growing centrality, William C. Kirby, T. M. Chang Professor of China Studies at Harvard University, has described Alibaba as "a private company that has done more for China's national economy than most state-owned enterprises."
Investment bankers agree: "It is a fascinating and strategic company," Russell Julius, Head of Banking, Asia-Pacific at HSBC told CNBC on Thursday. "They have been brilliant in building up their dominant market share in China. Obviously, discussions are at a very delicate stage and I can't comment on whether they will go to the U.S. or to Hong Kong."

Concerns surrounding economically-sensitive 'big data' gleaned from user transactions on Chinese e-commerce giant Alibaba's businesses may delay the company's planned U.S. listing, banking sources told CNBC this week, leading some to speculate that Beijing may even exert pressure on the company to list in Hong Kong.
Alibaba wants to arrange its initial public offering – which reportedly could value the company at $70 billion or more – to allow the company's founders to retain control, the Wall Street Journal reported this week.

But talks with the Hong Kong Stock Exchange broke off when the two sides couldn't reach agreement on that structure, according to the newspaper. Alibaba is now moving toward listing its shares in the U.S., people familiar with the matter said. The company's debut would be the largest technology IPO since Facebook's last year, which raised $16 billion.
But possible resistance from China's government – who may express reservations over the level of U.S. regulatory scrutiny paid to economically-sensitive data that can be 'mined' from the transactions on the company's 'e-tail' sites – may mean a U.S. listing could add another layer of complexity, possibly delaying the offering.

Eric Qiu, analyst at Guosen Securities, says the change of CEO at Alibaba opens the dorr for an IPO in 2014 that could reach as high a value as Facebook did.

"Ideally, the government would want Alibaba listed in Shanghai," said a Hong Kong-based investment banker. "But there's zero state-ownership of their shares," which may limit the government's ability to influence the outcome. "This is not a state-owned enterprise but a private company."
(Read more: Christie's sells $25 million of goods in its first China auction)
David Riedel, President and Founder of Riedel Research Group told CNBC on Friday, that Alibaba's U.S. listing may face headwinds but won't be abandoned altogether.
"You could certainly make that argument but I'm not sure you'd get very far with it," Riedel said. "You can make the same argument about Baidu for example, which has so much of the search history and of course it's listed here in the U.S."
China's e-commerce market is booming and has grown by 120 percent a year since 2003, according to the McKinsey Global Institute. The number of Chinese online shoppers has surged to 250 million, more than doubling in three years, The Economist reported in March, helping boost productivity rates in the broader retail sector.