Internet behemoth Alibaba is expected to launch the biggest public offering in history, as early as this week. And that will touch off more than a few ripples for U.S. small businesses and investors.
China's largest e-commerce company, based in Hangzhou, hopes to raise as much as $21 billion from the stock sale, which will value Alibaba at about $160 billion. That will instantly make Alibaba one of the most valuable U.S.-traded tech companies, nearly on par with Facebook and even much older tech companies such as IBM.
The offering, which will give U.S. investors a circumscribed opportunity to own stock in a closed foreign market, is likely to be a boon to U.S. startups, and it could shake up ecommerce as we know it in the U.S. But it also comes with some risks and cautions. Here are some takeaways:
- This is not Alibaba's first rodeo. The Chinese e-commerce giant tried to go public in 2008. Alibaba also listed on Hong Kong's Hang Seng exchange, only to delist after the company lost $20 billion of market value following the financial crisis. (That's not entirely unheard of, though. Domain registration company Go Daddy, which also announced plans for an IPO recently, cancelled its 2006 IPO, citing unfavorable market conditions.)
- If things go south, U.S. investors in Alibaba may not have as many rights. U.S. investors purchasing shares of Alibaba will do so through an accounting structure known as a variable interest entity, or VIE. The structure was invented in the 1990s to allow foreign investors to have limited ownership in Chinese companies. Alibaba set up VIE ownership through Alibaba Group Holding Limited, in 1999 in the Cayman Islands. It's unclear how enforceable the rights of VIEs are in Chinese courts, however. And that's a source of worry for some. Says Drew Bernstein, managing partner of the China affiliate for accounting firm Marcum Bernstein Pinchuk: "I am not aware of a single instance in the past 15 years where U.S. investors have actually gotten their hands on Chinese assets in an adversarial environment when you have a VIE agreement." The VIE structure is likely to be an added source of scrutiny for U.S. regulators.
- Alibaba's IPO could mean the end of U.S. e-commerce dominance. It could usher in a new era of international transactions, which could steal dominance from U.S. e-commerce leaders Amazon and eBay, although not any time soon. "In much the same way that you see Facebook and Google encroaching on each other's territory... Amazon and Alibaba will encroach on each other's territory," says Josh Green, co-founder and chief executive of Panjiva, a global trade information provider. "But we will still see Amazon as the dominant player in the U.S., and Alibaba in China."
At the same time, Alibaba's IPO could provide opportunities for small, innovative companies involved in everything from logistics to digital payments and online retail, experts say. And startups could benefit in other ways, as Alibaba has shown an appetite for investing in U.S. startups. Its fundraising conversations with messaging company Snapchat, and $120 million investment in online gaming company Kabam this summer are just two examples.
Venture capitalists such as Maha Ibrahim, a general partner at venture capital firm Canaan Partners, of San Francisco, see Alibaba's potential influence in the U.S. as a good thing. Canaan was a Series A investor in Kabam, and Ibrahim says tech startups could benefit from Alibaba's deep ties in China, with its burgeoning middle class, estimated at about 500 million people.
"You can't point to Alibaba and say it does one thing," Ibrahim says. "It's more massive than Amazon, and operates in a much larger market."
Despite its enormous size and staggering potential to control e-commerce in at least two huge markets internationally, Alibaba reported annual revenues of less than $10 billion in 2013. That's small compared to Amazon, which notched close to $80 billion, and Google, which had roughly $60 billion.
Alibaba's profit of $3 billion for the first nine months of 2013, the most recent reported in its SEC filing, surpasses the net income for the full year 2013 of either Amazon and Ebay. And with an operating margin of more than 40 percent, Alibaba surpasses Google, Amazon and eBay, whose margins are at levels of half that or less.
So while Alibaba's IPO may be just the beginning of a long engagement with the U.S., the wind is clearly at Alibaba's back. And its IPO is as much about China, as it is about Alibaba.
"If you look at the most significant economic events of the 20th century, it is arguably the rise of the U.S. middle class," says Green. "If you look at what is likely to be the most significant event of the 21st century, it is likely to be the rise of the global middle class, and that starts with China."