A whole new level

IFR Review of the Year 2014
10 min read
Anthony Hughes

All for one and one for all – that seemed to be Alibaba’s motto when it came time for the internet giant’s record-setting IPO. Levelling the playing field turned out to be good business for all concerned in the US$25bn deal.

In the old folk tale, only Ali Baba knew how to access the secret cave of treasure. But with the largest IPO in history, the real-world Alibaba has done a particularly good job of spreading the wealth around.

The company’s New York Stock Exchange debut this year is already the stuff of legends; Alibaba shares have risen nearly 70% in less than two months. Yet the success of the US$25bn sale, one of the most eagerly awaited listings ever, was hardly pre-ordained.

Chinese companies pursuing US listings have a decidedly mixed record. The e-commerce giant itself had already faced down one stock crisis in Hong Kong, where Alibaba.com was delisted in 2012. And founder Jack Ma was warned to pay heed to the troubles of previous mega-deal IPOs, such as Facebook’s disastrous debut two years earlier.

At first, Ma considered doing another Hong Kong listing. But as it became clear that the regulatory changes he considered necessary would take months (at least) to push through, he set his sights on the US market instead.

Chinese culture, it is said, values collective effort over individual achievement – and Ma seemed determined not to repeat the mistake of Mark Zuckerberg, whose stumbling Facebook IPO was dominated by just one bank.

For its adviser, the company turned to Rothschild, where Alibaba’s head of corporate finance had earned his stripes. There, head of Asian equity advisory Claire Suddens-Spiers and head of North American equity advisory Matthew Sperling crafted engagement letters for a syndicate structure that omitted the lead-left role typical in most US IPOs.

Instead, there would be a level playing field among the six joint bookrunners selected: Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Morgan Stanley and Citigroup.

“It could have been incredibly combative,” said Anthony Kontoleon, head of global equity capital markets syndicate at Credit Suisse. “It could have been a client saying: ‘We are going to reward you at the end based on what we hear and create an incentive structure where [the banks involved] don’t collaborate’.”

But it wasn’t going to be anything like that.

New way to do it

All the work was to be shared among teams of two banks – “Noah’s ark style”, as one participant put it – that would handle everything from prospectus drafting to legal documentation, roadshow materials preparation, offer structure, public relations, financial modelling and investor targeting.

None of the bankers invited had been told in advance where the kick-off meeting in Hong Kong on March 25 would be held , and all had to wait with their cars for a call with the location 45 minutes before start time – the Aberdeen Marina Club, where Alibaba had booked using the fake name of a non-existent industry conference.

Every single attendee had to stand and state his name, to assure all present there were no journalists on hand. Even JP Morgan vice-chairman Jimmy Lee had to do it, and he was one of the most well-known people in the room – at least until Ma himself turned up, halfway through, to rally the troops.

With the deal now live, the most important task for the bookrunners was to reach consensus on the top 150 investors likely to participate. Each bank submitted a list, including the expected order size from each account. The data were cross-checked with each investor’s largest known previous IPO allocation, and everything was consolidated into one master spreadsheet.

The process gave the syndicate further confidence that demand would be strong, even if market conditions were sour once the deal hit the road.

“It was not the amalgamation of six banks’ best friends, which is sometimes what happens,” said a second senior banker on the deal.

“There were pre-defined targets, pre-defined qualifications and really thoughtful approaches to how investors were bucketed. It was not your father’s allocation process. It was probably the most sophisticated allocation process we have ever seen.”

Just following orders

Still working in teams of two, the syndicate held “early-look” meetings in mid-June with the top 25 potential investors they had identified, which included visits to the company’s futuristic campus in Hangzhou.

The bankers wanted to know how investors were valuing the company. Most were using the basic price-to-earnings multiple, not the price-to-sales multiple more common in tech IPOs. And most were lining Alibaba up against Tencent, another Chinese internet power. But in yet another twist, the roadshow would start in the US instead of Asia. The syndicate wanted investors using US comps. Think Amazon, they said. Think Google. Think big.

When the nine-day roadshow began on September 8, the syndicate – still working mostly in two-bank teams – headed off to see more than 2,000 investors in New York, Boston, Baltimore, Los Angeles, San Francisco, Kansas City and Chicago, and London, Hong Kong and Singapore.

Wall Street heavyweights rushed to Ma’s side. Morgan Stanley chief executive James Gorman and Credit Suisse boss Brady Dougan introduced Ma at separate events in New York; the latter, a lunch at the legendary Waldorf Hotel, featured a guest list some 900-strong. Jimmy Lee went on the road with the company, as did Tyler Dickson, Citigroup’s head of global capital markets origination.

It immediately became clear that demand was not a problem. Some orders were so large that they represented up to 30% of the investor’s assets under management – and many times the percentage they would ordinarily devote to one stock. Books were covered on day one.

But the “most sophisticated allocation system ever seen” allowed the syndicate to screen out the noise in the order book and focus on the highest quality investors with a history of holding long term in the sector. Sticking with just the top 150 accounts, the book was covered in four days.

The extreme diligence paid off handsomely. Alibaba’s 11 times subscription bettered the IPOs of Facebook (five times), General Motors (seven times) and Visa (five times). And the syndicate scored a rare 100% hit ratio – every investor Alibaba met with put in an order. Final books were an eye-watering US$275bn.

“We saw strong demand not only from traditional buyers, but also from global macro hedge funds that don’t normally play the IPO calendar in size,” said Rothschild’s Sperling.

“Many investors saw the attractiveness of being able to use one stock to play the China theme – and trends such as the rise of the Chinese consumer and the internet – through a single stock,” he said. “[One] that would be a mega-cap with a large float and trading liquidity.”

Shares and shares alike

In line with company wishes, banks again divvied up the responsibilities. Credit Suisse was sole agent on the directed share programme, while Citigroup ran depositary receipts. Morgan Stanley did billing and delivery. CS and MS jointly handled lock-up release. And Goldman Sachs – having handled Twitter’s brilliant IPO the previous November – won the coveted stabilisation role, beating bids from JP Morgan and Morgan Stanley, which was still bruised from the Facebook snafu.

Barclays was brought in as designated market-maker to lead price discovery. Alibaba went for conservative final pricing of US$68 a share.

Yet again, attention to detail served the Alibaba team well. The banks and the company had run several weekend tests with the NYSE to make sure it could handle an expected record flood of orders. The tests “really did contribute to a very smooth opening”, said NYSE head of global listings Scott Cutler.

But Goldman chose to wait more than two hours before giving the green light to press the button and begin Alibaba trading. Goldman wanted as many orders as possible in the system before getting under way.

The stock surged 38%, opening at US$92.70. But there was only a 1.3% difference between the opening and closing price even as more than 270m shares, or 0.7 times the deal size, were traded. Goldman had no need to support the price.

“Opening the stock at a stable price was important to ensuring that shareholders continued to build upon their IPO allocations,” said David Ludwig, Goldman Sachs’s head of technology, media and telecommunications ECM.

“The trading patterns were consistent with what we communicated to the market, helping provide validation for investors to continue adding to positions.”

The stabilisation house had done its job. The six banks shared in a US$50m incentive fee as part of US$300m in total underwriting fees shared among the broader syndicate.

And Alibaba proved it had known how to access the treasure all along.

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A whole new level