Opinion

The Great Debate

from Breakingviews:

Alibaba payments cleanup makes for neater IPO

By Peter Thal Larsen

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Alibaba just can’t stop tinkering with its corporate structure. Weeks before the Chinese e-commerce juggernaut is due to start a roadshow for an initial public offering, it has tidied up relations with its payments affiliate. Though the new arrangement is still messier than shareholders might want, it should make for a neater IPO.

Alibaba’s relationship with Alipay is complex and sensitive. The unit processes more than three-quarters of the transactions on the Chinese group’s websites, but has been owned by a private vehicle controlled by founder Jack Ma since 2011. That business, known as Small and Micro Financial Services Company (SMFSC), is also home to other ventures like its fast-growing money market funds. For customers, the units connect seamlessly. The corporate links are more complicated.

The latest reshuffle aims to draw a clearer line between the two entities. Alibaba will focus on e-commerce, while SMFSC will stick to finance. As part the deal, Alibaba is handing its affiliate a portfolio of loans to small- and medium-sized enterprises. The transfer helps to reduce the risk of meddling by Chinese financial regulators.

Under the old arrangement, Alibaba received 49.9 percent of Alipay’s pre-tax profit. The new deal entitles it to 37.5 percent of everything SMFSC brings in before tax. Alibaba thinks the claim on the earnings of a bigger business more than compensates for its reduced share. Its accountants calculate that the restructuring has boosted the company’s value by roughly 1.3 billion yuan ($211 million). However, it’s hard for outsiders to be sure because Alibaba does not tell them anything about SMFSC’s finances. Besides, Alibaba admits that if the new arrangement had been in place for the last fiscal year, its net income would have been slightly lower.

from Breakingviews:

Alibaba tries out role of the noble monopolist

By Ethan Bilby

The author is a Reuters Breakingviews columnist.  The opinions expressed are his own.

Alibaba is trying out a new role: the noble monopolist. With an apparent 84 percent share of online consumer goods spending, it effectively owns the country’s Internet shoppers. Its payment affiliate is the biggest game in town. Both are attractions for its upcoming initial public offering. Alibaba’s long-term challenge is to keep showing that dominance helps the market rather than restricts it.

The company isn’t like China’s traditional monopolists. It comes from popularity rather than official handouts or restrictions – unlike, say, tobacco or salt, or the oligopolies that control telecoms and banking. Where “bad” monopolists promote inefficiency, Alibaba has done the opposite, connecting buyers and sellers who would never otherwise meet.

from Breakingviews:

China’s other e-commerce giant is priced to go

By John Foley
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Being second has its advantages. JD.com, China’s number two e-commerce company, has set an indicative range for its initial public offering that values it at around $23 billion. That’s far behind the $100 billion-plus price tag attached to rival Alibaba. But it leaves room for a decent performance.

Next to Alibaba, JD.com is an also-ran. It had 6.8 percent of China’s online shopping market in 2013, while its larger rival had around 84 percent, according to figures from iResearch. Moreover, JD.com loses money because it is investing heavily in logistics to handle delivery of its products. That’s an overhead that Alibaba, which matches buyers and sellers online, doesn’t have to worry about.

from Breakingviews:

Rob Cox: Crazy valuations not only sign of bubble

By Rob Cox
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Crazy valuations – even after a recent dip – are not the only signal that parts of the U.S. stock market, particularly internet companies, are in bubble territory. The willingness of investors in hot initial public offerings to accept second-class stock and governance that favors insiders suggests an imbalance between providers of capital and its consumers. Add head-scratching market caps based on contorted metrics, and this risks storing up trouble when the inevitable headwinds arrive.

The best description of the stock being hawked in this way is “coattails equity.” It offers little beyond a chance to tag along with entrepreneurs from Wall Street, Silicon Valley and China. Buyers of shares in IPOs such as those of Box, GrubHub, Moelis & Co, Virtu Financial and Weibo – and probably $100 billion-plus giant Alibaba – must give up rights that have traditionally accompanied the ownership of common shares, like a representative voice in corporate decisions.

A case of lobbysts vs. small cap investors

It’s tick season again: the time of year when those small, seemingly unimportant beasts emerge and attack the unsuspecting or unaware. This year, they seem to be everywhere and have a particularly robust group of carriers. The problem with ticks is that, while they seem benign, they can cause significant harm to those who are not vigilant.

But this is not about those annoying little creatures that hang out in the tall grass and spread Lyme disease. We’re talking about the kind on Wall Street, transported not by deer, but by a loud army of lobbyists.

Representative David Schweikert (R-Ariz.) and this army of lobbyists, a loose-knit association of exchanges, traders and others who stand to gain financially, are asking the Securities and Exchange Commission and Congress to consider legislation that will increase the cost of trading the stocks of smaller companies — those with market capitalizations of less than $500 million. Those stocks are often less-liquid stocks than those of large-cap businesses.

Buying our way out of the IPO era

In 1988, Michael Dell was a 23-year-old wunderkind who sold cheap computers directly to “end users,” which is what he called his customers. He arranged an initial public offering to raise cash and attract top-tier engineers and managers while basking in the light of transparency.

Dell was so small that the IPO wasn’t mentioned in the New York Times. At around $12 million, or $23 million in 2013 dollars, the book value of Dell’s common stock likely would have been too low to entice a modern-day Goldman Sachs, one of its lead underwriters. But Dell’s IPO was a winner. In two months, its stock price jumped from $8.50 to $19 per share. By the end of the year, it had made $159 million in sales.

Last week, Dell announced a stunning $24.4 billion leveraged buyout. If the plan manages to survive, it will allow Dell to reboot his ailing company free from the public glare. The deal is the largest of its kind since 2008, but it’s also notable because it marks the waning of the public company era.

Morgan Stanley’s Facebook curse

As Morgan Stanley’s retail force is learning, it’s hard being the anointed one. To most of the world, Morgan Stanley got the plum job of lead manager for the most important public stock offering since Google in 2004. But among the retail sales force at the firm, the Facebook Blessing might as well be known as the Facebook Curse.

The refrain from Morgan Stanley’s rank and file: The IPO of the decade is a lose-lose proposition. That’s because retail investors as well as smaller institutions are likely to be disappointed with their Facebook allotment. Institutional players know how things roll, but for the retail brokerage force, the situation is particularly vexing. Many clients assume that because it is a lead underwriter, Morgan Stanley brokers are on the inside track. That’s true, but means less on a popular IPO like Facebook’s. Financial advisers in the lead group, which also includes Goldman Sachs and JPMorgan, do have an edge over the 30 other investment banks tasked with distributing shares. But it’s not much of an advantage. Global demand for the $11 billion in shares appears to be much bigger than the deal itself. Institutional salespeople at Morgan Stanley are already warning clients that they expect the deal to be 20 times oversubscribed, one source explained to me.

It’s always been the case that only a thin sliver of retail investors would be able to get hot IPO shares. They were typically high-net-worth clients who reliably invest in every single IPO that would come their way – hot or not. Shakier deals, of course, were always available to retail clients. In its heyday, Lehman Brothers brokers used to say that some of the mediocre IPOs they pushed were from the “institutional waste basket.”

from Paul Smalera:

Facebook.coop

Facebook shouldn't pay its users. Its users should pay to own Facebook.

“Facebook was not originally created to be a company,” founder Mark Zuckerberg wrote in his letter to investors announcing the IPO of his already hugely successful and profitable company. “It was built to accomplish a social mission — to make the world more open and connected.”

Facebook has succeeded wildly, despite internal admonitions that its “journey” is only 1 percent finished. Journalists have latched onto Zuckerberg’s statement that Facebook wants to “rewire” the way the world works. In a world of thousands of self-anointed “social media experts,” only Zuckerberg can claim to have basically invented what the world thinks of as social media. He has etched himself into the timeline of human innovation.

Pity then, that Zuckerberg hasn’t turned his talents or attention toward Facebook’s financial underpinnings. After all, an IPO? How ho-hum can he get? If Mark really wants to accomplish his social mission with Facebook, he should share the company’s ownership with the people who helped him create it. Not just his Harvard contemporaries. Not just the programmers. Not even just the venture capitalists.

The death and resurrection of the tech IPO

ericauchard1– Eric Auchard is a Reuters columnist. The opinions expressed are his own –

The U.S. venture capital industry is desperate to repair the market for initial public stock offerings, but reviving the goose that once laid hundreds of golden eggs may not get very far.

The National Venture Capital Association (NVCA) this week set out its comprehensive plan to revive the IPO market and the heady investment returns that once fueled the tightly knit venture capital industry’s success.

Look to deal numbers for M&A green shoots

Alex Smith-GreatDebate

– Alexander Smith is a Reuters columnist. The opinions expressed are his own –

Volumes may be down, but there are green shoots appearing in the M&A market after the frozen winter of financial distress.

This doesn’t mean a return to the boom years of a few years ago. It could take years for deal values to reach the dizzy heights of the second quarter of 2007, given falls in asset prices. But the number of deals is recovering fast. This fell off a cliff in Q1 of 2009 and at just over 8,000 deals was the lowest global tally since Q3 2004.

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