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As one of the biggest IPOs on Wall Street, Alibaba received top notch professional advice. Photo: AP
Opinion
The View
by Peter Guy
The View
by Peter Guy

Alibaba's second life

Jack Ma and his managers asked for trust on life and death governance issues, but the only thing investors will trust are huge financial returns

What do you do when your dreams come true? What do you do when they don't?

Those are the existential, but real world questions that investors in the Alibaba IPO face as they literally take a blind gamble by trading caution for extraordinary growth numbers.

Never has such a large listed company openly featured such unfair and shareholder unfriendly corporate governance, a dubious track record for asset stripping and fundamental business misalignments between the founder and the company.

Besides the Alipay debacle, which Ma has not clearly addressed, analysts have pointed out that Jack Ma's loyalties are questionable because he only owns 3 per cent of Alibaba and 48 per cent of Alipay.

Don't forget that he also co-founded and manages his own billion dollar, private equity fund, Yunfeng Capital Fund II, that operates outside Alibaba's control and which Alibaba Group is an investor.

In a post-financial crisis world where high corporate governance standards and transparency are supposed to be absolute rules, what investment philosophies and guidelines did Fidelity and Blackrock have to compromise to become shareholders?

Such glaring conflicts would normally cause professional investors to reject typical China deals. The only logical reason and consolation making this trade off is to hope and bet on hot share price performance.

Alibaba needs to perform like Netscape Communications. Netscape not only proved to be a white hot issue, but ground zero for the entire internet IPO business. Netscape went public on August 9, 1995 at an offer price of US$28.

It reached US$74¾ on that day and closed at US$58¼. Netscape hit a record of US$174 in December 1995 and split two to one on February 7, 1996.

In the long term, however, Netscape cooled off. A year after the IPO, Netscape was trading below US$30 a share. (Adjusted for the split the offer price was US$14 and the high on the listing date was US$37. It reached a high of US$87 in December 1995). Then, it merged with America Online in March 1999.

Historically, that seemed to represent fair compensation for investors, but Alibaba and its bankers may regard that as "leaving too much on the table".

The opposite effect occurred with Facebook's IPO because by 2012 bankers squeezed out much of Facebook's value by allowing its unlisted shares to trade for years among private investors.

By the time it listed there was little value left relative to the IPO price, so it was easy to overprice and hence, traded badly.

But a year later, its share price doubled so all is forgiven.

However, the big difference between Facebook and Alibaba is that, according to a recent Reuters poll, 88 per cent of people had not even heard of Alibaba. So it needs to mount an intensive investor relation programme to cultivate a shareholder following beyond the IPO's investors.

As one of the biggest IPOs on Wall Street Alibaba received top notch investor and public relations advice. That was displayed in full force for Alibaba because it was probably the most challenging financial communications exercise in memory.

Alibaba wasn't a conventional IPO public relations exercise.

It needed to answer the thorny question: "Can investors trust Jack Ma?"

Overcoming public doubt is difficult when social media can't be influenced and managed like traditional media channels.

So it was no surprise that Alibaba's New York roadshow was so carefully scripted and conservative that it avoided mentioning that Alibaba was once listed in Hong Kong in 2007 and de-listed in 2012.

Questions from the New York audience were vetted before being presented to Ma and his managers to guard against a Wall Street style interrogation.

Despite much positive coverage in US media they could not eradicate the predominantly negative web comments and blogs about Ma's past business decisions and general distrust about mainland companies.

Alibaba's senior management seemed to be disconnected from its American audience as Ma tried to levitate above and beyond its past.

They resorted to that age old mainland Chinese explanation of "trust me" to address sensitive, life and death governance issues.

However, what investors will only trust as Alibaba begins its second life as a public company is huge returns.

This article appeared in the South China Morning Post print edition as: Alibaba's second life
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