North America and Asia-Pacific Equity Issue: Alibaba Group’s US$25bn IPO

IFR Review of the Year 2014
3 min read
Fiona Lau

The world’s largest IPO of all time was also one of the smoothest, with exemplary execution and a strong secondary performance despite its unprecedented scale.

The US$25bn New York Stock Exchange listing of Alibaba Group transformed the Chinese e-commerce giant into one of the world’s best-known – and most valuable – companies. But its significance goes far beyond that.

The IPO lifted valuations across the emerging Chinese technology sector. It prompted a review of listing rules in Hong Kong. And it showed just what is possible with the right approach to the capital markets.

Alibaba’s performance since listing – its shares ended IFR’s review period up 69% – made the IPO’s success look like a foregone conclusion, but it all could have been very different.

The company had initially planned to list in Hong Kong, but its partnership structure fell foul of local listing rules in allowing a minority to control board appointments. Once it became clear that a rule change would take months, if not years, Alibaba switched its attention to the US.

Together with independent adviser Rothschild, Alibaba divided work equally across the six joint bookrunners: Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Morgan Stanley and Citigroup. They shared negotiating with selling shareholders, prospectus drafting and valuation. Each bank handled a separate leg of a nine-day, two-team roadshow that took in 10 cities and reached over 2,000 investors.

Only the biggest potential investors received individual slots, and the syndicate’s predictions were justified with a 100% hit rate from those one-on-one meetings. More than 70 investors placed orders of more than US$1bn each, and at least one fund signed up for as much as US$4bn.

Alibaba offered 320.1m American depositary shares at US$60–$66 each, about 25 times forecast 2015 earnings at the top of the range. That was a discount to a 32x multiple for Hong Kong-listed Tencent, and the attractive valuation helped draw orders totalling US$275bn.

The overwhelming demand allowed the company to raise the price range to US$66–$68 three days prior to pricing, before pricing at the top. Bankers had told Alibaba they could price a successful deal slightly above US$70, but the company was focused on a positive secondary market showing.

With that in mind, each major allocation was discussed between the arranging banks and Alibaba’s management, with a view to putting as much stock in long-term hands as possible. The tactics clearly worked.

The shares soared 38% to close at US$93.89 on their trading debut on September 19, at which point the greenshoe was quickly exercised, taking the deal to a record-breaking US$25bn.

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North America and Asia-Pacific Equity Issue 2014