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Chinese internet giant Alibaba has finally filed to go public in the US. The initial filing says the company will raise $1 billion, but it will likely be a lot more than that. “There have been some suggestions that this will become the largest IPO of all time, or at least the largest tech IPO of all time”, says Dan Primack. The company announced plans to list itself in New York last March after it failed to meet the criteria for listing in Hong Kong.
Just what is Alibaba? The Wall Street Journal has a graphic-heavy explainer, and Bloomberg has a text-heavy one. The tl;dr version: Alibaba is the internet company in China. B. Riley & Company analyst Sameet Sinha told the NYT that the company is “like an Amazon, an eBay and a PayPal” (plus a variety of startups like WhatsApp and Uber, Quartz adds). Josh Barro joked that Alibaba’s retail business is “like Skymall on hallucinogens” after Business Insider rounded up a list of bizarre items for sale on the site. The list includes a life-sized, obese statue of Arnold Schwarzenegger, used panties, iron ore, and pure caffeine powder.
Steven Davidoff suggests that buying into the Alibaba IPO is incredibly risky. He says “investors in the offering won’t have title to most of Alibaba’s Chinese assets because of Chinese prohibitions on foreign ownership”. Instead, Alibaba is using a “variable interest entity” (VIE) structure. Investors in the US are buying equity not in Alibaba China, but in Alibaba Group Holding Limited (based in the Cayman Islands), which “has contractual rights to the profits of Alibaba China, but it has no economic interest”, explains Davidoff. Instead, most of the company’s assets will actually be owned by company founders Jack Ma and Simon Xie.
The VIE structure presents “two nightmare scenarios”, writes Charles Clover. First, there’s a worry that “insiders [like Xie and Ma] could make off with the company’s assets by simply removing them from the VIE”. Second, “China’s courts, which have turned a blind eye to the practice for more than a decade, could suddenly strike down the structure”. No one is quite sure that the VIE structure is actually legal in China. Davidoff notes there is precedent to suggest it is not. While it’s unlikely that Chinese courts would get in the way of this IPO, he says, they could if they wanted to.
However, Peking University’s Paul Gillis argues that VIE structures are a necessary evil because of Chinese foreign investment rules. Alibaba’s structure is the new gold standard, he says, because it minimizes the amount of business that runs through the VIE, which minimizes risk to shareholders. — Shane Ferro
On to today’s links:
“A surefire solution to inequality – increase fertility among the rich” – Alex Tabarrok
Three charts on secular stagnation – Paul Krugman
Studying the rich: Piketty and a shift in the social sciences – Mike Konczal
Cautious rentiers (including savers) “no longer serve a useful economic purpose” – Martin Wolf