Alibaba US IPO pushed by rivals

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 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 US 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's $16 billion offering in 2012.

"Alibaba realised 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 US 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% 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 kinds 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 Futures Commission (SFC) pushing back against the stock exchange's original draft proposals for a raft of rule changes. The SFC was adamant 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 US IPO "will make us a more global company and enhance the company's transparency".

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 US tech giants like Facebook and Google surging, but that smaller Chinese Internet companies such as JD.com and Weibo were forging ahead with their own US listing plans.

The technology-heavy Nasdaq Composite index has jumped 34% 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 US 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 US 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 with 24% and Japanese telecoms and media company Softbank with 37%. 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.

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 Alibaba representatives met the SFC several times throughout the year, but no progress toward a compromise ever materialised. 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 kick-start 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 authorised 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.

One person familiar with the matter said that before making the official decision to move the listing to the US, 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 US 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 Alibaba did not plan to issue the release, but that rumours and media reports were swirling. Management decided to finally put speculation to rest.

The announcement came only after Alibaba's senior VP 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, JP 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 25 March, people familiar with the matter said.

Meanwhile, Tango, the mobile messaging app-maker, announced Wednesday it has raised $280 million in a new funding round led by Alibaba.

By almost any measure, the investment amounted to a staggering sum for a mobile app developer. The deal, which came one month after Facebook 's stunning $19 billion acquisition of Whatsapp, underscored the lengths that Internet companies are willing to go to gain a foothold in mobile communications.

Alibaba invested $215 million while the remainder of the funding came from Tango's prior investors, which include Access Industries, Draper Fisher Jurvetson and Jerry Yang, a co-founder of Yahoo, Tango said. The investment gives Alibaba a minority stake in a messaging service with 200 million registered users and 70 million active users. Tango claims significant traction in North America, the Middle East, Taiwan and Singapore.

Alibaba, which views Chinese rival Tencent as its most serious competitor, has long recognised the threat posed by Tencent Holding's WeChat, a massively popular messaging app that has slowly morphed into an e-commerce platform.

Alibaba recently introduced a WeChat competitor called Laiwang, but the service has so far struggled to the extent that. Alibaba founder Jack Ma, according to various media reports, urged Alibaba's entire workforce last year to recruit new users.

Tango is the latest in a string of investments for Alibaba, which is preparing for a highly anticipated initial public offering in New York that could value the company at $200 billion.

In an interview, Tango co-founder Eric Setton told Reuters that he believed his company, which offers games, multimedia sharing and other content, would eventually beat Whatsapp, which offers purely text and voice communications.

"The platform approach I believe is the winning strategy," Setton said. "We've now seen it in a number of key markets, with Kakao in Korea or Line in Japan."

Tango, which has offices in Mountain View, California, Beijing and Austin, Texas, was introduced to Alibaba through Yang, who in 2005 led Yahoo's investment in the Chinese company.