What Can We Learn from the Alibaba IPO?

September 15, 2014

Alibaba will soon have its IPO event. Since it is likely to be the largest in history (expected to raise more than $20 billion), it deserves the media attention we see and hear on a daily basis. It is a truly exciting event. All eyes of the professional community will be on the initial pricing of the shares and the early trading.

How a Normal IPO Process Works

There will be a global institutional roadshow with group meetings and one-on-ones with company management for the largest institutions and/or best trading customers of the co-lead managers of the offering. The institutional investor research analysts and portfolio managers will scrutinize the business plan and financial model, asking focused questions in hope of receiving some added insight. Getting this ‘edge’ will help them determine the valuation they are willing to place on the company, which correlates into what they will pay for shares. This marketing period is considered essential for raising interest in the shares and determining price/value.

Alibaba is Not a Normal Issuer

As can already be seen in the case of Alibaba, there is less need to raise interest; the business mass media has done much of this already. In some respects, there may be too much interest in the shares. Individual investors will no doubt have a strong desire to participate in the offering as well.

The question on our minds is:

How is the demand for shares going to be translated into the initial offering price?

In this case, Alibaba management is sophisticated and understands bidding, trading, pricing, auctioning; their business model is based on transactional activity. Likely the Company has built into the process some method to balance their interest with that of the banks and the buyers they bring to the table so they work toward a fair pricing — balancing and aligning incentives between institutional customers of the world’s largest banks and the needs of Alibaba as an issuer.

What can be learned from the Alibaba IPO?

For issuers who do not have the leverage of a company like Alibaba, it can be harder to align interests between buyers and sellers – i.e. the investors and the issuer. While we believe it is important for a company to offer shares so they trade in a stable way in the aftermarket, we do not believe in overly discounting IPO shares. Although a first day ‘pop’ can make for great media headlines, it often disproportionately rewards large banks’ proprietary client base.

We believe it is better to use an auction mechanism to find a market price in a fair and open process. In the case of our OpenIPO® auction, all bids are treated equally with the goal of avoiding a first day ‘pop’ thus attracting long term shareholders and optimizing the total money raised for the issuer.