Why Alibaba's Giant IPO Could Launch U.S. Businesses
In the immortal words of a prominent American newspaperman, foreign companies are heeding the call: "Go West, Young Man."
Specifically, more overseas companies are filing for initial public offerings on U.S. exchanges. The latest and the biggest since 2012 to announce such plans is Alibaba, the Chinese company founded by entrepreneur Jack Ma, of which Yahoo owns more than 20 percent.
Contrary to fears that foreign companies, in particular those based in China, won't abide by U.S. accounting and oversight rules, really big IPOs are good for American startups, says venture capitalist John Backus, founder and managing partner of New Atlantic Ventures.
Alibaba's Jack Ma: 'I Went Back to China With the American Dream'
The Chinese internet entrepreneur remembers the sting of rejection--and the feeling of inspiration--from his first visit to Menlo Park.
"Alibaba and other foreign domiciled companies, once public, create a bigger pool of buyers for U.S. startups," Backus says. "More buyers means more 'liquidity' in the buyer market, and can also result in higher prices if more than one of [the investors] gets interested in buying a startup."
Although Alibaba did not set a specific timetable for the offering, it's widely expected to raise up to $16 billion through its listing, catapulting its company value to some $130 billion, and putting it in league with Facebook for biggest IPOs in recent history.
Alibaba, one of the largest ecommerce companies in Asia, is both an Internet payment service like PayPal, a shopping platform like Ebay, and a cloud services provider like Amazon and Google.
Chinese companies listing in the U.S. are hardly a new phenomenon. In 2013, eight companies listed in the U.S., Renaissance Capital reports in its 2013 Annual Review of the U.S. IPO market. Collectively, they raised $800 million. That's actually far below the 41 that listed in 2010, raising just under $4 billion.
"We think it is possible with Alibaba, Sina’s Weibo, JD.com and a host of others in the pipeline that 2014 will see the most China-based IPOs since 2010," says Kathleen Smith, principal at Renaissance.
That reverses a trend where foreign firms had fled the U.S. for a decade following the passage of Sarbanes-Oxley, whose strict oversight and audit rules were expensive and onerous for public companies to obey, according to law firm Pepper Hamilton. Eight German firms, including Allianz, Bayer and Deutsche Telecom all delisted from the New York Stock Exchange following passage of Sarbanes-Oxley.
Eased requirements for foreign companies, and greater flexibility in reporting regulations, has led to overseas companies to return in recent years. In 2013, a total of 28 foreign firms listed in the U.S., Pepper Hamilton says.
This year, Alibaba will be joined by King Digital Entertainment, maker of the Candy Crush Saga, whose IPO in the coming months is likely to vault the game-maker's value to nearly $8 billion. King will offer shares at a value between $21 and $24, double the price of competitor Zynga, whose IPO in 2011 crashed and burned. (Its shares currently trade around $5.40. King is based in Dublin.)
Foreign companies like Alibaba are also enticed by the enthusiasm in the U.S. surrounding IPOs, Smith says.
"For U.S. startups, we do not see crowding out here, but an affirmation by non-U.S. companies that the U.S. IPO market has greater trading depth and understanding of technology companies' business models," Smith says.