After a period of breathtaking growth, China’s biggest e-commerce company, Alibaba, has recently planned its initial public offering. Now the two major U.S. stock exchanges are ready to fight for the right to host. Though it has not been announced yet, Alibaba’s plan to raise $10 to $15 billion will likely overshadow Twitter’s highly anticipated Nov. 15 listing on the New York Stock Exchange. Relatively loose regulations in the United States, in contrast to Hong Kong’s stringent regulations, may be the fundamental factor that contributes to the biggest IPO since Facebook’s rocky debut last year.
No business better represents the rapid development of the e-commerce industry than Alibaba in China. The company itself is made up of several businesses, including consumer-to-consumer platform Taobao, business-to-consumer platform Tmall, and payment system Alipay. This is a comprehensive combination analogous to eBay, Google, and PayPal. According to Yahoo, which owns approximately 24% of Alibaba, the profit of its Chinese partner attributable to shareholders soared to $707 million for the quarter, which ended in June; meanwhile, sales increased by 61% to $1.7 billion.
The online retailer, which could be worth more than $70 billion based on analysts’ estimates, decided to explore listing in the United States after hitting a major snag at the Hong Kong Stock Exchange, which would not allow Alibaba founder Jack Ma and 27 other undisclosed senior executives to retain control of the company after the IPO—in contrast to the dual class share structure of Google, Facebook, and other American technology companies.
This dual-class structure is quite controversial but also typical for U.S. high-tech and Internet companies where founders seem to be the most valuable assets. The idea is that absent the pressures of the public market, founders and executives can pursue the long-term interests of the company by keeping a tight grip on it, as if it were still private. Though the founder’s stock may be significantly diluted as the company goes public, he is allowed to impose substantial influence upon the board when making strategic decisions under this structure. In a business that requires constant innovation and capital investments, like Facebook and Google, original partners with much stronger voting rights would protect the company from becoming a victim of short-term market demands.
However, the Hong Kong Stock Exchange explicitly prohibits the existence of dual-class shares that preserve corporate control. Even if Alibaba is willing to compromise and give more power to shareholders, negotiation between the two parties have reached a deadlock. Charles Li, the chief executive of Hong Kong Exchanges and Clearing, suggested leaving the door open to potential changes to the existing rules, though he did not mention Alibaba directly. Indeed, Hong Kong’s failure to secure the Alibaba listing would be a considerable loss and may make Hong Kong less attractive to other companies.
Conversely, the deregulation in the United States may well explain why it has maintained its role as the leader in competition for global IPOs. Thanks to the JOBS Act, the restrictions imposed on foreign companies who expect to go public in the U.S. have been greatly reduced. In addition to allowing the dual-class structure, foreign companies are exempt from federal accounting rules, quarterly reports, proxy statements or compensation disclosure, which are required for American companies. Thus, New York may be the ideal place for Alibaba, a complex company with over 20 different operating companies.
The immediate question is whether the New York Stock Exchange or the NASDAQ Stock Market will host Alibaba’s IPO. But a more difficult question to answer is whether the United States is pushing global listings standards down? Is it a race to the bottom or the top?