After a year of waiting, the man running what could be the biggest-ever technology IPO finally lost patience with Hong Kong.
Joe Tsai, the Alibaba Group Holding executive in charge of plans for the highly anticipated deal, only abandoned hope of a Hong Kong listing in the last few weeks, according to people familiar with the matter. The company's shareholding structure, giving senior managers sway over board appointments, would not pass muster with local regulators.
The final straw was the snail's pace of a public consultation process of reviewing local listing rules on which Alibaba had pinned its hopes, the people said. That delay, coupled with a rush of Alibaba rivals seeking to tap the frothy U.S. tech market, forced the company's hand in the end, the people said.
Last Sunday, after nearly a year of talks with Hong Kong regulators and stock exchange officials, Alibaba said it will list shares in the United States in a deal expected to exceed Facebook Inc's $16 billion offering in 2012.
"Alibaba realized this was not a battle that they could have won within the time frame they were looking to float the company," said Keith Pogson, managing partner for financial services at consulting firm EY in Hong Kong. "So they decided to find a home that was more accommodating with such structures."
Alibaba's choice is a blow to Hong Kong's financial industry, in terms of lost prestige, fees and trading volumes. The absence of a large, dynamic tech company will sting the Hong Kong exchange as it tries to diversify its publicly traded stocks away from Greater China financial and property companies, bolstering its status as a global financial centre.
Hong Kong's loss is the U.S. financial industry's gain. The deal has the potential to bring in about $300 million in advisory fees alone for the banks involved, based on an estimated 1.75 percent commission.
The saga pitted a Chinese tech juggernaut and its financial advisors against securities officials guarding rigid shareholding rules meant to protect retail investor interests with a one share-one vote guarantee, in a city where family-run businesses and tycoons hold heavy influence.
"It's a shame that Hong Kong lost the deal, but we lost the deal for good reasons," said EY's Pogson. "So we should congratulate the Hong Kong regulators for sticking to their guns on values, for showing that Hong Kong is a robust market where these kind of issues do matter and people care about investor protection."
Alibaba had held out hope that a review of Hong Kong's shareholding rules would keep the door open for a listing in the city, the people familiar said.
But the public consultation moved slowly, with Hong Kong's Securities and FuturesCommission (SFC) pushing back against the stock exchange's original draft proposals for a raft of rule changes. The SFC was adamant that the proposed changes to the city's listing rules should not be influenced by Alibaba's hopes for a Hong Kong listing, the people familiar said.
Alibaba said it would not add to its Sunday statement, which said a U.S. IPO "will make us a more global company and enhance the company's transparency."
FORGING AHEAD
The original plan to list late in 2013 had already gone by the wayside last year in part because of SFC opposition to Alibaba's unique corporate structure. Under Alibaba's statutes, the company's partners are able to nominate and control the board - a challenge to the one share-one vote standard applied in Hong Kong.
While Alibaba waited for Hong Kong regulators to make a decision, Tsai and company co-founder Jack Ma could see that not only were the stocks of U.S. tech giants like Facebookand Google Inc surging, but that smaller Chinese Internet companies such as JD.com and Weibo were forging ahead with their own U.S. listing plans.
The technology-heavy Nasdaq Composite index has jumped 34 percent over the past year, and has featured IPO candidates in the last year that have stoked views that the index is reaching bubble levels.
As the stalemate with Hong Kong regulators dragged on, there was concern within Alibaba's camp that the market's appetite for what could be one of the largest IPOs ever would wane the deeper into 2014 the deal moved, people familiar with the matter say.
Alibaba has yet to say which U.S. exchange it hopes to use, or confirm a timetable for the sale. A listing on either the New York Stock Exchange or the Nasdaq could come as soon as the end of July, people familiar with the matter say.
A listing in New York would mean scrutiny from U.S. regulators and class action lawyers. Yet it would also mean access to bigger pools of money from investors with deep knowledge of the technology sector, possibly boosting Alibaba's valuation.
Alibaba's largest shareholders are Internet services company Yahoo Inc with 24 percent and Japanese telecoms and media company Softbank Corp with 37 percent. Based on the average of 12 analysts, Alibaba is estimated to have a market value of $141 billion.
Based on that valuation, and Yahoo selling half its stake, as previously agreed, the IPO could raise more than $17 billion.
TURF WAR
The stance by Hong Kong's SFC against Alibaba's partnership structure surfaced last year, through a series of private meetings. People familiar with the matter said that Alibaba representatives met the SFC several times throughout the year, but no progress toward a compromise ever materialized.
One way around that impasse was a proposal by the Hong Kong stock exchange to alter the city's shareholding rules to make them more flexible.
If the stock exchange, together with input from the market, could draft new shareholder rules with the SFC's approval, a window for an Alibaba IPO would remain open. Given the months that such public consultation processes take, Alibaba still could have secured a deal by the end of 2014, people familiar with the matter say.
Instead, Alibaba got stuck in the middle of a turf war between the stock exchange and the SFC, a person familiar with the matter said.
The stock exchange operator, known officially as Hong Kong Exchanges and Clearing Ltd, or HKEx, drafted a consultation paper on the rule changes and sent it to the SFC earlier this year, hoping to kickstart the process. But the SFC sent the draft paper back to the HKEx last month, proposing a series of changes.
"The SFC didn't want the HKEx to rush through the consultation paper. It was pushing back and telling the exchange, 'You guys are not the decision-makers,'" said the person, who was not authorized to speak to the media.
The SFC declined to comment. The HKEx said a discussion paper on weighted voting rights and other topics would not be published this quarter.
RUSHED RELEASE
One person familiar with the matter said that before making the official decision to move the listing to the U.S., Alibaba would have contacted Chinese authorities to let them know of their choice. Beijing officials preferred to have the company listed and regulated in Hong Kong, rather than overseas.
Sunday's statement announcing plans for an IPO in the U.S. was the first time the company had ever officially acknowledged its stock offering, and the first time it pinpointed the location.
People familiar with the matter say that Alibaba did not plan to issue the release, but that rumors and media reports were swirling. Management decided to finally put speculation to rest.
The announcement came only after Alibaba's senior vice president and head of corporate finance, Michael Yao, a former Rothschild banker, led phone calls to the investment banks courting the company for months, informing them they would play a role in the deal, people familiar with the matter said.
Citigroup, Credit Suisse Deutsche Bank, Goldman Sachs, J.P. Morgan and Morgan Stanley are working with Alibaba on the IPO, with the first formal meeting of bankers, lawyers and accountants to map out the IPO process scheduled for March 25, people familiar with the matter said.
