August Insight - Alibaba Will the IPO Price Be Right?

When and where will IPO has not been announced.  Yet, a larger question lurks, namely will the IPO – when it comes, which it inevitably will – resemble another Facebook or, alternatively, be accurately priced?

Ideally, the underwriter will link the company’s IPO share price to actual revenues rather than to the abstract, but exciting potential of China’s internet and GDP growth.

If systemic challenges are not overcome, the IPO may eventually come to be labelled by investors and the media as Ali-Fail.  Difficulties associated with predicting Alibaba’s future revenue in an environment of macro-economic uncertainty abound.

As new State leaders settle into their future work, many important, but especially two key questions are likely to arise:  First, what is the on-going role of the State in the economy?  Second, when and how to renew China’s commitment to globalization on the basis of reciprocity?

If the economy under Xi Jingping and Li Keqiang retains the current strong support for State Owned Enterprises, then, for example, UnionPay may expand its interest in internet payment market to replace Alipay or renegotiate their  current revenue sharing relationship.  Likewise, Tmall may lose revenue to upstart Ule,  Tom and China Post's e-commerce joint venture.

On the other side of the spectrum, if the reciprocity policy setting is genuinely embraced by the new leadership, then Alibaba will likely face increased competition from players of scale as a new wave of foreign investment comes to be directed to China’s internet sector.  Meanwhile, Jack Ma is seeing continuing disruption to his domestic stronghold from a range of local predator companies like 360Buy.  Potentially, Alibaba may be pitted to fight a multi-front war against EBay, and PayPal as well as the company’s local rivals.  

There are other risks. For example, Alibaba has made significant cash investment to buy out Yahoo from its share register and the public float in Hong Kong of its listed trade portal.  If Alibaba has to wage a multi-front war as hinted at above, then it will probably have to go into heavy spend mode with accompanying risk to earnings per share. History proves that fighting on two fronts usually results in defeat.

Having managed to build itself into a diversified ecommerce player in a protected market, Alibaba now works in various ways as EBay,, Global Sources and PayPal, but all housed in one corporation.

There are potential downsides of this diversity including internal management challenges and corruption.  Managing a complex ecommerce empire can create a breeding ground for conflict of interests and a myriad of loopholes for clever employees to walk through for their personal benefit at the expense of the market.  

The traditional trade portal may also be undermined by new understanding by exporters that advertising on Baidu and Google may bring business leads through a more targeted and financially-efficient approach.  There are also next generation companies like Panjiva waiting in the wings to steal this traditional revenue base by providing better solutions.

Alternatively, Jack Ma the self-proclaimed Vietcong Guerilla of the internet may retain his Colonel Kurtz aura and beat his competitors by being smarter and faster to adapt to meet the market’s requirements.  If he is not able to do this then post-IPO he may be the next Mark Zuckerberg and encounter calls as was the case of Kurtz in Apocalypse Now, for his command of the company he successfully founded to be terminated with extreme prejudice.

© 2010 Intercedent | Site by ChinaNetrix