Investors are digging deeper into Alibaba’s complex legal framework!
The highly publicised Alibaba Group Holdings IPO is slated to launch on the New York Stock Exchange after Labor Day. After substantial acquisitions by the Alibaba Group during July and August, the CEO Jack Ma in consultation with the Securities and Exchange Commission (SEC) decided to push back the IPO. This IPO is touted as the biggest ever in the history of the US. But there are many inherent challenges that the company faces after it lists, not least of which is how to get the stock to rise.
Analysts are uncertain precisely how much the Initial Public Offering is likely to generate, but figures in excess of $20 billion have been touted. As with many IPOs that initially generate considerable interest, the trick is how to keep that momentum going to boost the share price going forward. There is talk of bankers working tirelessly behind the scenes to generate plenty of hype for the upcoming IPO. Institutional investors will likely need to carry the momentum of the IPO forward with upwards of 4 times the size of the deal. To keep demand bullish, buyers will be required to cough up tremendous sums of money.
US Investors Kept in the Dark with Alibaba
The Alibaba Group (BABA) remains an enigma to many U.S. investors. While it is clear that this is the largest Internet company in China, it is less clear how the company operates. The company’s governance structure remains a source of concern since a small group of partners has the power to elect most of the corporate board. There are also complex ownership laws in place as a result of China’s regulations in respect of foreign-ownership limitations.
Of particular importance to savvy U.S. investors is the fact that the Alibaba Group is incorporated in the Cayman Islands. The reason why this presents many challenges going forward is that companies incorporated outside of the U.S. are barred from inclusion in major U.S. benchmarks. These include the MSCI Inc or even the S&P 500 Index. This material fact is an important one as Alibaba will not be included in funds that oversee trillions of dollars in investments, and stocks that are not in indexes can’t be bought by those funds. The S&P 500 Index has $5.1 trillion in assets tracking it.
China considers taxing Alibaba customers
With all the hype surrounding the imminent IPO of Alibaba, the Chinese government has jumped on the bandwagon, too. China is now considering taxing the e-Commerce market. According to news reports, the State Taxation Bureau will conduct research into the matter. The use of an e-invoice system is being considered for 2015. This will initiate the process of collecting information that is required to establish a tax regime. Presently, the use of e-invoices is restricted to a few geographic regions in China. Some of these retailers include Yixun.com and JD.com Inc. The taxation system may be viewed in a negative light by budding online retailers using Alibaba.com. There has been no mention of the proposed tax regime by Alibaba CEO Jack Ma, as mandated by the terms of the SEC. During an interview in November 2013, Jack Ma expressed his support for the legal and ethical reasons behind tax payments. According to the CEO, just 6% of vendors will need to pay taxes since the vast majority don’t meet threshold requirements.
Alibaba may be excluded from other indexes
Since Alibaba is Chinese-owned, incorporated in the Cayman Islands and soon to be listed on the NYSE, there are several challenges it faces. Various emerging market indexes and several Chinese indexes will likely not include Alibaba. The company’s domicile and listing prevent it from being included in major indexes such as the MSCI and the FTSE Group, among others. It is clear that the absence of Alibaba stock in major indexes will impact negatively on the stock. However, it should be borne in mind that Alibaba is not without major investors in the form of Yahoo Inc. (YHOO) as well as Softbank Corp. Investors looking for U.S. influence with Alibaba can take heart that Yahoo Inc (YHOO) has a vested interest of 24% of Alibaba.
Once the September IPO goes public, Yahoo shares are expected to rise. Yahoo Inc (YHOO) has plans to sell 140 million (BABA) shares in the initial public offering, but this is 68 million less than what was required in earlier agreements. By doing this, Yahoo will be able to defer tax payments and hold on to more of Alibaba stock in the hope that it appreciates over time. Yahoo is expected to use the proceeds of its sale of Alibaba stock to purchase shares. This particular announcement bodes well for the company. There is still a great deal of uncertainty for Yahoo as to precisely how a tax-efficient framework will be put in place with Alibaba.
There are passive index funds that do not buy into IPOs and these funds wait for index inclusion to occur. Many of the bigger IPOs are partially supported by increased demand from active funds that buy stocks in the hopes that they will be included in the index. Exclusion from an index is not necessarily a bad thing either, argues Banc De Binary. If for example, fund managers are looking to generate greater yields than an index, and they believe that Alibaba (BABA) will prosper, they may in fact even add the stock. It is important that demand for BABA stock will remain after the IPO. Many of the funds that exclusively focus on Chinese firms will be unable to conjure up the high demand that would be required to keep BABA growing. Alibaba and its allies will have to work the phones 24/7 to pitch the investment potential of the stock to portfolio managers across the spectrum. It may be necessary to punt the stock as a solid investment for general Internet stocks.
Freeing investment funds from companies linked to Alibaba
Since the majority of investors don’t have the necessary capital laying around for big investments in Alibaba, there is the option to sell stock of companies that are invested in Alibaba such as Softbank and Yahoo. Also, Alibaba can be viewed as a replacement stock for many other Chinese stocks since it’s essentially a broad gauge of overall Chinese consumption. There is also the flipside of the equation: Chinese stocks are inherently more risky since they are subject to Chinese government overreach and a unique regulatory framework. As for Alibaba in China, many investors there will be unable to buy the stock since it’s listed on the NYSE – this further complicates the growth potential of the stock with its domestic base.