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Alibaba filed paperwork on Tuesday, May 6, 2014 for a $1 billion public offering. It is expected to increase significantly and could become the largest tech IPO of all time.
If your first thought reading that is "What the heck is Alibaba?", you're probably not alone.
Alibaba is a household name in China and well-known among certain tech industry watchers and investors abroad, but it doesn't exactly have mainstream recognition among consumers in the United States. That might change after its IPO.
To help you get a head start learning about this fast-growing tech company, we've put together a primer on what Alibaba does, how it got so big and what impact it might have on other U.S. businesses.
What exactly is Alibaba?
The Alibaba Group is the largest ecommerce company in China and, according to some reports, the largest in the world. It primarily consists of two big shopping websites: Taobao, which launched in 2003 to compete with eBay in China, and Taobao Mall (or Tmall), an online shopping marketplace.
So basically it's just China's version of Amazon?
Not quite. Unlike Amazon, Alibaba doesn't actually handle any of the logistics — like fulfillment centers — for online shopping. It just creates the platform and user experience for consumers to shop from various brands.
Even that user experience is notably different. Kelland Willis, an analyst with Forrester Research says.
"When you are buying something on Amazon, you are engaging with Amazon. When you buy on Tmall, you are engaging with the brand."
Alibaba's investments also extend well beyond traditional ecommerce. It has invested in a Chinese department store operator, mobile messaging app Tango and Weibo, China's version of Twitter which recently went public. It is also reportedly in talks to get back a stake in Alipay, a payment service like PayPal.
Screenshot of Alibana's Taobao Mall ecommerce site (Click Image To Enlarge)
Just how big is it?
Alibaba generated more than $3 billion in revenue for the fourth quarter of 2013, an increase of 66% from the same quarter a year earlier. Its gross profits for the quarter shot up by an even higher percentage to just under $2.4 billion.
The Wall Street Journal reports hearing from sources that the combined sales volume on Taobao and Tmall hit $240 billion in 2013. On Single's Day, which is essentially China's version of Cyber Monday, Taobao and Tmall topped $5.75 billion in sales. That's more than double the sales of all online retailers on Cyber Monday.
Alibaba is expected to go public with a market cap of around $165 billion, though some analysts think it may top $200 billion.
Click Image To Enlarge
How does someone even build up a company that big?
Alibaba was founded in 1999 by Jack Ma, an eccentric English teacher-turned-entrepreneur who became interested in building Internet companies after going online for the first time in 1995 while on a trip to Seattle.
Alibaba Group CEO Jack Ma (Click Image To Enlarge)
The secret to Alibaba's success, according to Forrester's Willis, is a combination of launching when the ecommerce market was still small in China and going out of its way to build trust with consumers in the country.
Willis says.
"What Taobao did from the beginning was they created a set of regulations that absolutely ensured consumers get the product they ordered. It builds trust with the brand. As a result, consumers thought of Alibaba Group as a whole as one they could trust to interact with."
One example of that is the option to pay cash upon delivery, after the shopper has had a chance to inspect the item in person.
China's ecommerce market has also ballooned in recent years and is expected to be larger than that of the United States in the not-too-distant future.
Why is one of the largest companies in China doing a public offering in the U.S.?
Initially, Alibaba reportedly wanted to go public on the Hong Kong stock exchange, but decided otherwise because regulators in the country would not greenlight its proposed governance structure. But Alibaba stands to gain other benefits from listing in the U.S. as well.
R.J. Hottovy, senior analyst with Morningstar says.
"By listing in the U.S. you open up the doors to a lot more potential investors. There are some question marks about accounting and security rules outside the U.S. and European markets. The U.S. listing will add a layer of creditability."
Alibaba Group's headquarters in Hangzhou, China (Click Image To Enlarge)
Will the Alibaba IPO have any impact on U.S. tech companies?
The Alibaba IPO is coming at a time when investor sentiment for the tech sector has weakened thanks in part to sky high valuations. That could change if Alibaba proves to be a strong IPO.
Hottovy says.
"If it was successful and did well and was priced with a premium valuation, I think that could have a halo effect on the broader tech space. It could spur some renewed interest in the space."
At the very least, it will have a notable impact on Yahoo, which as a 24% stake in Alibaba and stands to net as much as $10 billion from the Alibaba IPO, depending on how it prices. That could give Yahoo and CEO Marissa Mayer the additional resources needed to make some big acquisitions.
COMMENTARY: Among the biggest shareholders set to profit from the IPO is Yahoo, which holds a 22.6 per cent stake, and SoftBank, the Japanese telecoms group which has 34.4 per cent. While SoftBank executives have said it plans to retain the stake, Yahoo will sell part of its holding and its current director on the Alibaba board will step down.
Other known investors include Singaporean sovereign wealth fund Temasek and US fund Silver Lake. Mr Ma himself holds 8.9 per cent of the company.
Corporate governance activists, however, have questioned the board structure that Alibaba is proposing. Under the terms, a 28-member management partnership of senior executives from Alibaba and affiliates has the “exclusive right” to appoint a majority of the board.
With that level of control kept by the partnership, “it really all comes down to what is the quality of those independent board members,” said Gary Hewitt, head of research for GMI Ratings, a governance analysis group.
The company named only three members of a board that will have nine people: Mr Ma, Joe Tsai, the executive vice-chairman, and Softbank’s Masayoshi Son.
The company’s Chinese retail platforms had 231m buyers last year, just shy of one-fifth of China’s total population, and nearly 40 per cent of the number of Chinese who use the internet. Its ambitions are expanding, however, both across other sectors of China’s internet and outside its borders.
Its many operations include a small business loans division, a group buying site, cloud computing business and an online advertising exchange. It is affiliated with China’s largest online payments processing network, Alipay, although that business was spun off in 2011 to a separate vehicle and is not part of the listing.
Alibaba has also embarked on an ambitious, multibillion-dollar string of deals to broaden its reach beyond ecommerce. So far this year, it has taken stakes in companies ranging from China’s largest video hosting site, Youku Tudou, to the US start-up Lyft, a car ride-sharing service.
Jixun Foo, a partner at venture capital group GGV Capital, which had been an early investor in Alibaba said.
“You should think of them beyond an ecommerce player, just as Amazon is going beyond ecommerce to compete with Netflix, for example, in the so-called online video space. They are testing the water on many fronts.”
Most of its revenue comes from online marketing, commissions on transactions and fees for its services. In the nine months to December 31, it generated revenue of $6.5bn and net income of $2.8bn, according to the filing.
Alibaba is being advised by Credit Suisse, Deutsche Bank, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Citigroup.
Courtesy of an article dated May 6, 2014 appearing in Mashable and an article dated May 6, 2014 appearing in the Financial Times Tech Hub
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