What’s Next for Alibaba?
The giant China-based conglomerate Alibaba raised more than $13 billion in November in a stock offering on the Hong Kong Stock Exchange, five years after its record-breaking IPO at the New York Stock Exchange. The offering was the largest of the year until the Saudi state-owned oil company Aramco raised $26 billion in December. We asked Yale SOM’s Heather Tookes and Matthew Spiegel, who have studied the performance of companies after IPOs, what their research suggests about Alibaba’s prospects and its next steps.
The Alibaba Group’s listing ceremony at the Hong Kong Stock Exchange on November 26, 2019. Photo: AP Photo/Kin Cheung.
You’ve studied the performance of companies after IPOs. What does your research suggest about Alibaba’s prospects after its IPO in Hong Kong?
After an IPO, a firm’s performance typically deteriorates relative to what investors see in the years immediately prior to the IPO. However, the Alibaba IPO is not an IPO in the sense people think of one. I suspect that when most people hear the phrase, “Initial Public Offering” they have in mind a private company that lists it stock on a public exchange for the first time. In this case, Alibaba was already listed on the New York Stock Exchange. The Hong Kong listing is a second IPO. Having said that, the shares are fully convertible between the New York and Hong Kong stock exchanges. The Hong Kong listing just makes it more convenient for investors in Asia to trade the shares. However, the price in both markets should be nearly identical. Otherwise, you can (and would!) buy shares on the exchange where they are relatively cheap and sell them on the one where they are relatively dear.
The Hong Kong IPO looks more like a typical firm’s “seasoned” stock offering, in which an already public firm issues more publicly traded stock. Estimates indicate Alibaba raised about US$13.4 billion. That is a lot of cash that they will add to their already considerable cash holdings. They have not, however, made clear what they plan to do with the funds. Likely it will be spread around. Some will go towards R&D, some to new infrastructure and some towards the acquisition of other companies. One interesting possibility is that Alibaba may buy out some or all of SoftBank’s shares. Estimates put the value of SoftBank’s holdings at around US$120 billion. So even if all of the funds from the IPO went towards this goal, it would still leave SoftBank with a considerable stake in Alibaba. Given SoftBank’s recent losses with WeWork, they might be anxious to realize some of their profits in Alibaba.
Alibaba has been listed on the New York Stock Exchange since 2014. How does that change the dynamic?
Since the Hong Kong IPO is more like a seasoned listing, it probably means that Alibaba will not see the kind of performance deterioration that is typically seen after a true IPO. Another reason to think that the firm’s future performance will likely continue unimpeded is that the Hong Kong IPO will likely instill Alibaba into Beijing’s good graces. Having the stock trade only on a U.S. exchange is not ideal if you are Beijing and trying to convince the world to invest in your markets. With Alibaba’s expansion to Hong Kong, that potential friction with the Chinese government should be alleviated.
Alibaba has had two large IPOs and Saudi Aramco, the Saudi state oil company, had an even larger one this month. Is there something driving large, established companies to go public now?
It is hard to see a pattern when comparing these two firms. The Alibaba and Aramco IPOs do not appear to have a common cause. Additionally, the two IPOs didn’t occur closely together in time. Alibaba listed on the NYSE back in September 2014 and Aramco went public in December 2019. What is interesting is how large (relative to western companies) Alibaba and Aramco became prior to going public. It may be that in China being large and private lets a firm tap funding sources that a private U.S. firm of equivalent size may have difficulty tapping. The same may be true of Aramco given its ties to the Saudi government.
More generally, a factor that has enabled very large firms to remain private is rise of incredibly large private equity funds. SoftBank’s Vision Fund (its private equity arm) initially raised $93 billion, with $45 billion of that coming from Saudi Arabia’s wealth fund. In this case it was private equity that aided in Alibaba’s ability to stay private, but much of that “private equity” came from government sources.