After a year of hand-wringing over how much the company would be raising, its listing day has finally come. The initial public offering mints a multi-billionaire in founder Jack Ma, and is a huge payday for Yahoo.
Edgar Su / Reuters
Alibaba is finally going public in the United States today well above its initial public offering price of $68 — with the share price expected to land somewhere north of $88.
At more than $88, Alibaba — one of the largest e-commerce companies in the world — would be worth more than $215 billion, eclipsing not only other commerce companies like eBay and Amazon, but also Internet companies like Facebook.
The pop was not all that unexpected. Alibaba already once raised its price range during its "road show," a two-week period during which the company makes its sales pitch to investors as to why they should buy shares. In pricing at $68, Alibaba set a record for the largest-ever U.S. listed IPO, raising $21.77 billion before accounting for an additional batch of shares that the the banks underwriting Alibaba's IPO have a chance at purchasing. Alibaba basically made the claim that it was worth $168 billion, but the market has decided it is worth much more — greater than $210 billion.
Alibaba's business is thanks to the commerce environment in China, which has enabled the company to mint an incredibly profitable set of businesses selling goods online with low overhead. The company is worth more than twice that of eBay, and more than Amazon — and its margins are likely the envy of the latter, boasting 47.5% of its revenue converting straight to profit for its 2014 fiscal year. Amazon's gross margin for its most-recent operating quarter was 30.7%.
Most of its revenue comes from Chinese-centric commerce applications, including Taobao Marketplace, one of the country's largest online commerce services, and Tmall, China's largest third-party commerce platform where retailers sell their products. In going public at that high a valuation, Alibaba is not only showing it is one of the largest commerce companies in China, but it is showing it seeks to expand that footprint internationally.
That will still be a challenge. For its 2014 fiscal year, Alibaba brought in $7.3 billion in revenue from Chinese commerce, but only $782 million from international commerce. Its international commerce segment grew 16.6% year-over-year, compared to 54.7% growth in its Chinese commerce segment, according to the company's IPO documents filed with the Securities and Exchange Commission.
Still, the company has raised a massive war chest in order to continue expanding, and it has begun making a series of strategic investments in companies outside the country. One particular area is in the United States, where it has invested in companies like Shoprunner, a members-only online shopping service, and Tango, a video messaging application. Alibaba has also emerged as another attractive acquirer for U.S. venture-backed companies alongside not only Facebook and Google, but also Chinese Internet giant Tencent. When asked about whether he would acquire US companies, founder Jack Ma said on CNBC that he would be open to many types of partnerships, but only if it could help small businesses.
"Before I turned 50 years old my job was making money," he said. "But now that I've turned 50 years old, it's helping people in China make money."
Alibaba's listing day brings to a close an end of an era of sorts for not only the hotly-anticipated initial public offering of Alibaba, but also one for Yahoo. Under new CEO Marissa Mayer, the company has essentially received a pass to acquire dozens of companies and try to find a new direction for its stagnant advertising business as long as it returned proceeds from its stake in Alibaba to shareholders.
And Yahoo intends to — the company's executives, Mayer and CFO Ken Goldman, said Yahoo intends to return half of its 22.4% stake in the company to shareholders, likely in the form of dividends and share buybacks. When Alibaba goes public, Yahoo will immediately mint a return of more than $10 billion, half of which is destined to be returned to the investors that have patiently awaited Alibaba's initial public offering since an incredibly savvy early investment from Yahoo founder Jerry Yang.
Yahoo's remaining stake in the company, which represents 16.3% of its outstanding shares according to its most-recent filing with the Securities and Exchange Commission, seems eventually destined to be funneled back into Yahoo and its shareholders. Thanks to some of Mayer and her team's negotiating prowess, Yahoo was able to sell fewer shares as part of Alibaba's IPO — likely banking on the expected pop that occurred when it begins trading today.
After Alibaba goes public, it mints a multi-billionaire in its founder and represents a potentially huge windfall for both its employers and patient investors who have awaited this day for more than a decade. In selling more than 12 million shares, Ma nets himself proceeds of nearly $1 billion (about $870 million, to be exact) before taxes and proceeds. Ma, who still owns nearly 8% of the company, has a stake worth more than $13 billion at the initial public offering pricing, which rose to more than $16 billion with the expected initial trading price today.
The final question mark that remains, however, is what Mayer plans to do with the remainder of the company's windfall from Alibaba's IPO after it has returned half of it to investors. Mayer has aggressively acquired companies in order to find a new future for Yahoo, but so far hasn't been able to find a "killer app" that will bring the company to prominence in 2014. It spent $1.1 billion on Tumblr as its largest acquisition, but that still hasn't quite turned out to be a massive success yet.
And after all is said and done, Mayer will be out of leisure time and pressure will be on to find a future for Yahoo after Alibaba.
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