Who can stop the Dragon Alibaba at NYSE?

One of the most talked about events of the year is now a reality. The e-commerce giant Alibaba has introduced its IPO to NYSE this month. It is incredible that the share prices rose by 30% on the first day of trading to upsurge the market value of the company to $230 billion, making it the fifth most valuable company after Apple ($614 billion), Google ($387 billion), Microsoft ($382 billion) and China Mobile ($259 billion). On the same day, stocks in Alibaba sold at about 25 times higher than the estimated 2015 underwriter’s projection.

As Alibaba’s IPO takes-off, a series of challenges are expected to follow native companies. The company profit dwarfs Amazon.com’s and eBay’s. It’s earning were around $1.35 billion between October-December, which is 100% higher YOY, and in the first three quarters accounted for $3.5 billion for the fiscal year, which ended in March. Amazon’s net income reported was $274 million for 2013 while eBay’s net income was $2.86 billion.

Not only Alibaba’s growing revenue, but also the tax benefits that company gets, poses a great challenge for its competitors to deal with. According to Alibaba’s prospectus, the tax paid by the company in the year 2013 was 11.9%. This lower tax slice for the company will be a competitive weapon against other global e-commerce giants. If we compare the tax paid by some of the US giants, the rate is much higher than the rate Alibaba paid, giving them a better profitability margin. The large tax benefit leveraged by Alibaba might prompt investors to look at the US-based industry leaders more critically and analyse how the tax benefit gained by Alibaba can yield more profit when compared to companies like Amazon, who have paid a huge amount of tax in percentage terms last year. As a result, Alibaba’s tax superiority might become a threat in the battle over global e-commerce domination.

Up until now the whole kit and caboodle looks good for Alibaba. However it is not the complete scene, as the company has their own set of challenges to overhaul. Some of the major challenges have been listed below:

  • Being a non-US company, Alibaba’s shareholders will get less protection compared to that which US companies offer.
  • The Alibaba partnership will have the rights to nominate the majority of the Company’s directors, and two of the major shareholder SoftBank and Yahoo should give their consent for the partnership nominees every year.  The enforcement might hamper the board-level decision making which might affect the overall ability to influence investors.
  • One of the foremost challenges that can affect the prospective shareholder decision is that the shareholders will buy their shares in the US, but they will have to coordinate with the authorities in China. This means Chinese taxes will apply on dividends or benefits if the Company is deemed a “resident enterprise “in China.
  • Some of the other challenges, such as the Government’s strict control over Chinese Internet infrastructure, regulatory challenges on Alipay, anti-monopoly laws in China, and Chinese economic slowdown can impact the decision making of the shareholders who are willing to invest their money in Alibaba.

This is not the end of list of problems that might halt the Company’s dreams of becoming the world’s biggest player. Of late the Company has been questioned about its business ethics and security for buyers due two major polemics. In one of the instances, 2000 Alibaba certified Gold Suppliers defrauded buyers. In another instance “Starting in 2012, U.S. law enforcement posing as an American broker representing Iranian clients posted a call on Alibaba.com to purchase uranium. A year later, “Patrick Campbell,” a smuggler travelling under a stolen passport, took the bait and was arrested at John F. Kennedy International Airport in New York City with a sample of yellowcake uranium hidden in his shoes”. These might be some of the instances that the Company would want to leave behind. The Company seems to shield itself from the controversies, but the company will have to take some firm steps to avoid similar instances in the future in order to maintain a good level of confidence in investors.

Even after overcoming all the pitfalls and probable challenges, the company got off to a good start at the IPO launch. If the current movement of numbers and investor interest is analysed, Alibaba is certainly in a strong position.

As Jack Ma, director and CEO of Alibaba said “eBay may be a shark in the ocean, but I am a crocodile in the Yangzi River. If we fight in the ocean, we lose; but if we fight in the river, we win.” However, it seems that Jack Ma is all set for a contest for the top position and everything is falling into place for the company. It will be interesting to watch how Alibaba takes it forward, investing in new markets, performing and keeping the expectations of investors buoyant.