The tech world is accustomed to stratospheric valuations, but even this was too much for some. Alibaba.com’s trading debut ended with its share price touching HK$40 (US$5.12), nearly three times what it had opened at. The Hangzhou-based business-to-business (B2B) internet portal, which raised US$1.5 billion in its initial public offering a week earlier, had become a company with a US$25 billion market capitalization overnight. Even the most bullish analysts couldn’t believe it.
Could a company that is essentially a glorified Yellow Pages really be worth more than Baidu? Could a website involved in the unglamorous business of connecting buyers to suppliers around China really have achieved the second-largest tech IPO in history?
These questions surround the seemingly magical rise of Alibaba and its charismatic and contrarian founder Jack Ma.
A brand apart
While it is only the B2B portal that is listed, other parts of Ma’s Alibaba machine have claimed some impressive scalps.
The group’s consumer auction portal. Taobao. drove eBay out of the Chinese market, undercutting the US powerhouse with free listings for users. EBay, which bought EachNet in 2003 to become eBay EachNet in China, drained its advertising budget but couldn’t come up with a reply. On December 19, eBay confirmed it would become the minority partner in a joint venture with TOM Online. It was tantamount to a capitulation.
“[EBay’s move] points out that oftentimes it makes more sense find partnerships than attempting to do it yourself,” said David Wolf of Wolf Group Asia, a technology-focused advisory firm in Beijing. “[But] they’re still a distant second.”
Ma himself can provide the best example of foreign-local partnerships. Before beating eBay, he had already scored another coup, gaining control of Yahoo’s China operations in August 2005. Yahoo invested US$1 billion in cash in return for a 40% equity stake in Alibaba Group.
“Together we will create one of the largest internet companies in China,” Yahoo’s chairman and CEO Terry Semel said at the time. Such is Yahoo’s continued faith in Ma that it subscribed to US$100 million-worth of shares in the Alibaba.com IPO.
Now, though, the pressure is on Ma to live up to investors’ expectations.
After the IPO, Forbes quoted Ma saying that he wanted to turn the company into a “leading e-commerce platform for China, Asia and even the world.” But doing so would entail entering markets where he, not the competition, would be the alien player. If he is to rely on a local partner, he would have to decide how to structure such a relationship – the very question that has vexed foreign players in China in the past.
A clue may be found in the revelation that Alibaba is discussing a joint venture with Softbank in Japan.
“Softbank has the technical capacity, it’s the right type of business, so it’s an obvious partner,” said Paul Woodward, founder of consultancy Business Strategies Group in Hong Kong.
There’s also the possibility of acquisitions. One rumored target is Hong Kong-listed Kenfair, which is in the exhibition business, but Woodward dismisses it as being far too small to make an impact on a company of Alibaba’s size.
Exactly a year before the IPO, Ma hired a new CEO for Alibaba.com. David Wei came from a decidedly non high-tech background, having been president of B&Q China, a British do-it-yourself home improvement chain. While Wei may ostensibly be a poor choice to lead a web company, it turns out his experience could serve Alibaba.com well.
According to research firm Euromonitor, B&Q China’s profit in 2003, a year after Wei became president, was about US$800,000. Two years later, it was turning a profit of more than US$11 million. He also oversaw the acquisition of a competitor, Obi China, which was bought by B&Q’s parent company Kingfisher in April 2005. The deal was worth US$160 million and added 12 stores to the B&Q network.
“He turned B&Q from a losing company to a profit-making company in a very short time,” said Yang Fan, a Euromonitor analyst who watches the company.
Wei also has experience dealing with both international chiefs at Kingfisher and bosses of the smaller companies that supply B&Q and also form Alibaba.com’s client base. Knowing how to balance foreign and local interests could be the key to Alibaba.com’s next growth phase. In any case, he’s done pretty well at Alibaba.com so far. According to David Cummins at research firm JLM Pacific Epoch, about 40% of the site’s paying users joined this year, which coincides with Wei’s tenure as CEO.
“At the end of the day, [Wei] is responsible for growth, and they’ve had a very good year so far,” he said.
How Wei will achieve more growth isn’t clear. The Alibaba.com model is based on sellers, mainly located in China, paying the company annual subscription fees starting from US$700 a year. Subscribers get to display their member status on the website, signaling their trustworthiness to potential buyers. This model means Alibaba has a large sales force scouring the country and knocking on factory doors that it could beef up.
Another way forward is to extend the services offered. Alibaba.com functions as a matchmaking site at the moment, useful for what people in the sourcing business call “lead generation.” But the B2B dream is to get customers to pay for more value-added services, from better placement in search results to handling entire sales transactions on the site.
“B2B sites do the introductions but they don’t take part in transactions right now. Ultimately, the goal of all these sites is to take part in the transactions,” Cummins said.
Ma snubs the US
Alibaba’s listing raised eyebrows not just because of its size, but also because of its location. The firm chose to go public in Hong Kong instead of with NASDAQ in New York, a route favored by most Chinese tech companies as it is seen as a better place to attract investment.
One reason for choosing Hong Kong could be the less rigorous and expensive regulatory regime. The Sarbanes-Oxley Act means that companies listing in the US have to spend more to comply with regulations while the smallest carelessness can prompt severe punishments.
Opting for Hong Kong also means a second listing could be done in the US if even more capital is needed in future.
An important aspect of the listing is that it is only Alibaba.com, the business-to-business website, that investors are buying into. The consumer auctions site Taobao, the escrow service Alipay and the desktop client Alisoft remain under the purview of the Alibaba Group, of which Alibaba.com is also a subsidiary.
The financial reason for splitting up the group this way is that almost all of its revenue comes from the B2B site – about 90%, according to JLM Pacific Epoch. While Taobao, for example, has been successful in grabbing market share, it has still to become a profit center.
But another, typically shrewd, reason for taking only Alibaba.com public is that the other divisions will be able to operate in relative secrecy as Ma figures out a way forward. Indeed, he has said in the past that he liked the fact that Alibaba was a private firm competing against public giants as it gave him an information advantage.
“Jack Ma doesn’t want to give away too much of his mojo,” said David Wolf. “The longer he keeps his cards close to his chest, the more time he has to build these firms.”
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