Hong Kong 0, New York 1?

 
Employee walks past Alibaba sign

Hong Kong has seemingly lost the biggest IPO since Facebook. The loss, though, may do more to bolster Hong Kong's reputation in the longer term.

China's Alibaba, the world's largest e-commerce company, has reportedly ended talks with the Hong Kong Stock Exchange and will try to list in New York.

Think of Alibaba as Amazon, eBay, PayPal and Groupon all rolled into one. Its initial public offering could be bigger than Facebook, whose IPO valued it at $104.2bn (£65.2bn).

Alibaba's profits are 10 times that of Facebook, but it may be wary about repeating Facebook's post-IPO dive. Analysts estimate that it could be priced at $120bn or as low as $60bn - that is about 84 times estimated 2012 net income.

Alibaba was seeking an arrangement that would have allowed the executives to control a majority of board seats. So the founder Jack Ma with 7% of shares and his executives, who together hold about 10%, could have appointed five of the nine directors on the board.

Retaining control with a minority of shareholding is not allowed in Hong Kong in order to protect ordinary shareholders.

Dual class shares or other such arrangements where founders can retain control of a company is permitted in the US. Thus it looks like Alibaba is headed to New York unless talks can be revived.

It looks like the Hong Kong regulators stuck to their guns despite the risk of losing the listing. It is no doubt a blow, as Hong Kong is where large Chinese firms have listed since they were permitted to sell shares overseas. For instance, Alibaba's biggest competitor, Tencent Holdings - which is Facebook, Twitter, Zynga, and Tumblr all on the same platform - trades in Hong Kong.

But Hong Kong may be more worried about its longer term reputation.

By making an exception for Alibaba and allowing minority shareholders to control the company, a slew of Chinese companies would have followed.

Of the 2,500 companies that are listed on China's stock exchanges in Shanghai and Shenzhen, just a quarter or about 600 are private firms. The rest are state-owned with a minority of shares that are listed and can be publicly traded.

Hong Kong could have faced a large influx of Chinese state-owned firms that could have been overwhelming for the bourse. After all, Chinese state-owned firms are about half of the biggest companies in the world.

The ability for the state to retain control with a minority equity ownership would have proved attractive for some of the state-owned enterprises. But for shareholders in Hong Kong and globally, it may be less so. The principle of treating all shareholders equally is what the Hong Kong regulator is protecting.

For Hong Kong, a special administrative region of China, which has a 50-year "one country, two systems" policy since being handed back in 1997 from British rule, it is important that it signals to investors how it will operate.

By saying no to Alibaba, Hong Kong seems to be saying that it will retain its prudent regulatory system and protect shareholders even if it means losing the biggest tech IPO in the world.

But the story still has a long way to run, regulators do change, and an IPO of this size will be battled over undoubtedly for some time to come.

 
Linda Yueh Article written by Linda Yueh Linda Yueh Chief business correspondent

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  • rate this
    0

    Comment number 25.

    I have mixed views about Hong Kong Stock Exchange's rejection of Alibaba's proposals to list in Hong Kong. Obviously, it's a huge loss for Hong Kong and a fantastic opportunity for NYC.

    Are we being too inflexible and turning away much needed business? Maybe?! However, as an investor in Hong Kong, at least I know I will be treated fairly and all my shares are first class. No second class crap!

  • rate this
    0

    Comment number 24.

    Just remember that when you buy from Alibaba you are not covered by your countries trading laws.

    I bought a tablet which was faulty on receipt, it cost me £32 (not refundable) to return it for a replacement.

    They need to be in-line with EU and other countries trading laws before any floatation.

  • rate this
    0

    Comment number 23.

    Interesting.

  • rate this
    -1

    Comment number 22.

    When you buy in HK in the shops you run a high risk of being sold defective goods or have the wrong item packed up. Always check at the shop or before you fly, Obviously you will then struggle to get your money back or the goods exchanged if they are defective. They will tell you you are in the wrong shop and the assistant who sold them will hide. Do not think you are in Manchester,

  • rate this
    0

    Comment number 21.

    yes, Hong Kong is a special Admin.region in China but it just a politcal name. actually, HK is another State within China. average chinese people from mainland who want to travel to HK have to apply a 7-days travel visa from chinese government and if they want to move into there, sorry, it is impossbile unless you could pay almost 7million HK dollar.so what you think about this magic tiny pastry?

  • rate this
    0

    Comment number 20.

    Bradford:
    "The time of Western companies sourcing everything in China is in decline."

    No it ain't. There has been a steady rise in the last 10 years for Western countries sourcings goods from China, mainly due to the fact that Chinese firms can now produce goods to whatever quality their clients want, largely due to cheap wages. This is why Alibaba can now be floated. - it is very profitable.

  • rate this
    -4

    Comment number 19.

    Ali-ba-ba

  • Comment number 18.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this
    -2

    Comment number 17.

    So what? Excuse me whilst I yawn.

  • rate this
    -2

    Comment number 16.

    Linda, I detect some wishful thinking here. HK is a great place, that I love, but it owes its greatness purely to its British heritage (the rule of law, open markets, an open society...). Now it's governed by an ugly, autocratic regime, it will alwasys be shackled and in 2nd place in such contests.

  • rate this
    -4

    Comment number 15.

    Flotation of the company doesn't necessarily means they have done fantastically well

    Apart from the raising finances they are trying to get worldwide recognition?
    I have never heard of this company until I went to wiki a few minutes ago

  • rate this
    +2

    Comment number 14.

    Well done Hong Kong.

    Protection of small shareholders is vital. I find it shocking to learn that the USA is so lax in this regard, compared to Hong Kong.

  • rate this
    -6

    Comment number 13.

    Talking of HK business ethics my experience of the Shops there is very sour every trick in the book to rip you off. Honesty and integrity they have none. To think we might have trained them to do this makes me feel sick. We should think twice before out sourcing anything out of the UK - in the end we will all have more £'s in our pockets.

  • rate this
    0

    Comment number 12.

    I hope the concept of sourcing everything from China is in decline as I feel these actions also fueled the 2008 crisis. The major building company I worked for has a separate company set up to offer Clients of all new building projects tendered for savings to offer like for like British Specified products sourced from China throughout the buildings. Profit to clients UK jobs lost in manufacturing

  • rate this
    -3

    Comment number 11.

    This is the best news ever. Once Alibaba have floated, myself and tens of thousands of others may find it significantly easier to sue for the copyright, trade mark and other intellectual property infringements which form the mainstay of Alibaba's content. Once this happens, if the IPO brokers can then convince the Russians to do likewise, I may even get paid for some of all my hard work.

  • rate this
    -1

    Comment number 10.

    The time of Western companies sourcing everything in China is in decline.

    If I was the owner of Alibaba, I would be selling.

    I certainly would not be buying

  • rate this
    -2

    Comment number 9.

    Valueing any E commerce business, such as Facebook or Alibaba at such high % over/above yearly earnings & with actual physical assets being so trivial, is a recipe for disaster & I would have no sympathy for any investors who may at some point lose everything.

    ALL those businesses who use/trade on Alibaba would also need to meet USA regulation, re money laundering/terrorism etc

  • rate this
    -4

    Comment number 8.

    Ali Baba and the forty thieves. You know where you stand.

  • rate this
    -2

    Comment number 7.

    Planned standard protocol - sell shares and leave the company with a nice package including propped up share price

  • rate this
    -3

    Comment number 6.

    This is not over yet. You can bet that pressure will be brought to bare on H.K. from China to make an exception in order not to miss out on this IPO.

 

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