Will Alibaba IPO dash investors' hopes again?
Issues of concern include the firm's acquisition strategies, transparency level and governance
The newest version of the Chinese internet boom rides atop the latest technology bubble in the United States. For more than a week, analysts have been poring over Alibaba Group's filing for its initial public offering. Understanding the sustainability of these stocks and the sources that feed the bubble offers a unique insight into Alibaba's pricing and its future as a technology giant.
Today's internet titans sustain their valuation stories by paying for sky-high acquisitions with sky-high-priced shares. Facebook's purchase of messaging service WhatsApp and virtual-reality eyewear firm Oculus for valuations once reserved for life-saving drugs puzzled markets.
They may only be setting a benchmark for acquisitions that are obtusely related to the buyer's original business. Only time will tell how and if they support Facebook's historical price-earnings ratio of 100 and price-sales and price-book ratios of 20.
Alibaba could re-imagine and transform itself into a digital media conglomerate
Financial and technology strategists can justify even the most obscure acquisitions as the inspired work of visionary founders. However, all of this ends when the market runs out of sizable growth opportunities.
If its initial share sale is record-setting, Alibaba will be hard pressed to justify acquisitions valued at less than US$1 billion or even US$10 billion because even if they double in value, there is little appreciable effect on the group. Beyond the hype, shareholders have to consider that making too many acquisitions creates integration and management problems.
Competitors have made large and suitable technology targets, the source of ever-higher valuations, harder to find. Ironically, Yahoo could end up being owned by Alibaba after the float if it fails to execute its turnaround after selling most of its Alibaba stake.
Owning Yahoo would instantly create a formidable entry into the US market. Alibaba could boldly re-imagine and transform itself into a digital media conglomerate by taking over a major Hollywood studio like Columbia TriStar, which Sony could sell as part of a restructuring, or Legendary Pictures, which is seeking closer Chinese ties.
Institutional investors must decide if Alibaba is suitable as a core investment or a hedge fund play. The need for effective corporate governance imposes clear standards for each investment in a mutual fund. However, hedge funds can exploit event risk arbitrage opportunities in areas of uncertain or conflicted transparency.