There are strange things happening in the world:
- Scotland seems to think it can separate from the United Kingdom without ramification (f***wits, if you’ll pardon my cockney).
- There is the rising threat of an Islamic Caliphate (is this the 7th Century?).
- U2 just gave away an entire album on iTunes. To everyone. For free.
Oddly, I am most concerned by that third one. Because I have feelings on the psychology of free stuff. Mainly:
- I usually like the music I buy.
- Not least because I bought it.
- The act of giving up some options in order to own that album means that I’m naturally more inclined to like it. My brain, being loss averse, doesn’t like to admit that it might have made a bad buy – it wants to like whatever was bought.
- Whether this is irrational or not is a bit irrelevant. It feels, to quote Sheldon Cooper, both prudent and evolutionary: to generally prefer what I have because I gave something up to have it.
- The flipside being that if I get something for free, then it’s not worth very much.
- So I’m almost certain to like the new U2 album less than the other music in my collection (after all, I’m loss averse about the paid-for stuff).
- THAT SAID
- I still buy most of my music.
- Which does place me in the diminishing minority.
- So perhaps, in the grand scheme of things, the world will just settle on a newer lower equilibrium of appreciation for music. An equilibrium that tends toward ambivalence.
Anyway – that was an extraordinarily long prelude to this other strange graph*:
*and I owe a shout-out to my friend Yoyo on twitter, for so succinctly putting together the graph with the comparisons.
What you’ll notice is:
- Since last week Wednesday, Naspers’ share price has been dropping off.
- Almost entirely aligned with Tencent’s share price.
- And Amazon, for that matter.
- While Yahoo’s share price has been rising.
Alibaba. And the release of its IPO prospectus on September 5.
Alibaba is a competitor to Tencent and Amazon – hence the drop in their share prices in anticipation of Alibaba’s IPO next week. A significant stake in Tencent is owned by Naspers – hence the Naspers share price decline in tandem. And Yahoo owns a significant chuck of Alibaba – hence its share price rise in anticipation of the IPO (and more on that in a moment – you’ll see why shortly).
Who/What Is the Alibaba Group?
- Alibaba.com itself – which is basically amazon for companies.
- Aliexpress.com – which is basically amazon.
- Taobao.com – the Chinese ebay.
- Alipay – the Chinese alternative to Paypal.
- multiple other businesses that have spun off from the above.
Talking of Alibaba.com
Alibaba.com does something for Chinese manufacturing that is not really replicated elsewhere. Instead of having to fly to China and source a fixer and visit strange factories and hangout at karaoke bars and have your prices pushed around and your products altered without your consent – you can now just alibaba it.
Would you like to buy a Boeing 747?
Perhaps you’d like to buy 10 boeings for your new budget airline start-up. Or rent them.
Maybe you’d like to order a diesel tanker:
Or ship in some metric tonnes (at least 10) of green coffee beans that may be arabica but could also just be arabic:
A Go-Pro alternative to sell at flea markets?
All very possible.
So what does Alibaba do? It introduces you to suppliers:
And then it allows you to pay into an Escrow account until the transaction is complete:
I don’t want to call it “revolutionary” – but I’ve read the horror stories. I’ve also occasionally written about them (see News Item 2 in this post).
At the same time as protecting the western buyer, Alibaba is also opening up the door of Chinese manufacturing to the small business guy – the one that can’t afford to fly to China to try and work out the process. It allows him/her to compete on price of input with relative ease. For those bold enough to use it – it could prove re-generative.
And I guess it helps that there’s an IPO going on. As a case in point: I’m suddenly looking at Alibaba with more than just casual interest. I’m not the only one. I can’t help but think that this whole IPO situation is, in part, a giant PR exercise to bring the option to the attention of those businesses that might use it most.
So I like the idea. Next question: and what about the price?
The Alibaba IPO
- This IPO is huge. In the magnitudinal sense.
- Alibaba plans to issue 320 million shares.
- The share price is expected to be between $60 and $66 per share.
- If it lists at 66 bucks a share, then we’re talking about a capital raising of $21 billion (which would value the company at around $200 billion).
- It would also make it the most valuable IPO ever.
- That said – most of the capital being raised is not actually capital raised at all. It will go to the selling shareholders (it’s here in the prospectus).
- The IPO is being underwritten by six (six!!!) banks – and they’re not taking a particularly giant fee for doing so.
So talking about the $66 per share:
- It is quite a high PE ratio.
- But weirdly, it’s almost on the nose in terms of the valuation prepared by Aswath Damodaran (a finance lecturer at New York University). Here (check out the middle box on the left side):
- Which is probably a function of those 6 banks – because if they’re all sharing slices of the pie, then pushing the share price higher collectively doesn’t really get them too much more pie individually (read Matt Levine on this). So there’s less incentive to overdo it, and we seem to be watching price and value coincide quite nicely.
- Also – it’s a giant issue of shares, relatively speaking. So there could be some concern that not all the shares would sell if it’s priced too high (oh – the horror).
Meaning that, in my book, Alibaba is probably one to get in on.
- There are Chinese government issues – so you’re going to be buying shares in a Cayman holding company that has a side legal agreement and it’s all quite complicated – but nothing ventured.
- Also, in corporate governance speak, Alibaba is still going to be Jack Ma’s baby, and you’re not going to have too much of a say. Which is probably a good thing – I mean, leaving the company in the hands of a man that built Alibaba from nothing into the world’s largest e-commerce company? There are worse things to live with.
Getting Your Alibaba On
Unless you’re an institution or very mate-y with some Wall St guys, you’re not going to be able to buy shares until Jack Ma has rung the NYSE bell. Your options:
- Give your broker some orders and get him to buy shares on the day (because the IPO is so large – it will probably take a while for the price to move too dramatically – although high frequency traders could make your buy uncomfortable).
- Buy Yahoo shares immediately! They, after all, own 24% of Alibaba.
- I believe that it’s also possible to buy some options… But that’s not really my vibe.
As for dates: the rumour is next Thursday (the 18th).
Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.
Kosta September 11, 2014 at 10:50
Damn that was funny (you had me in stiches at Boeings and Arabic(a)). But why list in America?Reply
Jayson September 11, 2014 at 11:00
Because that’s where the big money is? I think there’s still something to be said for the liquidity and depth of US equity markets. If you’re going to be big, you need to be on the NYSE or the NASDAQ. Or possibly the London Stock Exchange – but even then…Reply
Kosta September 11, 2014 at 11:19
Yeah sure, so long as the petro-dollar is propping up the US economy, which is something China has been keeping a close eye on. I haven’t checked the numbers of late, but I recall China held more US treasury bonds than Zuma could count, and they won’t dare sell for fear of stengthening their local currency and thus making their manufacturing exports less favourable. So I just find this decision to list in the US, well, odd. One of your linear causality lists will help clear things up I’m sure 😉Reply
Jayson September 11, 2014 at 11:37
Haha – I do have a certain tendency toward linear lists of causality!
From the petrodollar side of things – I would make two observations:
1. The current low oil price is being driven by the glut-like production in the US and Saudi – both of which are dollar denominated. I’m not sure that the petrodollar is going anywhere soon.
2. And even then, I’m not so sure that the petro in the petrodollar will continue to be that important. If China drives global trade, and it chooses to denominate its trade in dollars, then we’ll have sinodollars. Which could be just about the same thing?
As for the US treasury bond holdings by China – I suspect that the real issue is more one of “Well where else do we put our trade surplus if not in US capital markets?” The scale of that requirement is just too vast – and US capital markets have a massive headstart on other possible competitors after having held the global hegemony for so long.
In some ways, the only real competitor that could establish that kind of capital market would have to be one of the current creditor nations (ie. China) – but doing so would damage the surplus that they’ve already accumulated. And more importantly, it would require a level of financial liberalisation that I’m guessing the Chinese government would prefer to avoid.
But I’m likely to be wrong and/or missing something. I’d be interested to hear any alternative interpretations!Reply