- Alibaba IPO shareholders will only have “claim to profits” of the Chinese owned variable interest entities without any direct ownership of these companies.
- Investors looking at the Alibaba IPO must weigh in the risks of this complicated structure and Chinese regulations in order to arrive at an informed investment decision.
- However, this isn’t a huge risk as large investors like Yahoo and Softbank are also exposed to the same risk and most China based companies listed in the US also have this inherent risk.
Alibaba (NYSE:BABA), the Chinese online commerce and technology giant is all set to launch its IPO within the next week. While the stock will list and trade on the NYSE under the ‘BABA’ ticker, investors should give a thought to what they will eventually own and also the risks involved in the ownership. So who owns Alibaba?? And does the listing on the NYSE entitle shareholders to ownership of the Chinese properties Taobao, Tmall and the various others operated by Alibaba?
The answer as to who owns Alibaba would seem obvious at first with the answer being ‘shareholders of course.’ However the answer isn’t as simple as it seems. If you are beginning to wonder why, let’s look a bit deeper into Alibaba’s latest F-1 (amended) filing with the SEC.
One paragraph from Alibaba’s latest F-1 filing with the SEC throws light on the ownership structure. It states,
“Due to PRC legal restrictions on foreign ownership and investment in, among other areas, value-added telecommunications services, which include Internet content providers, or ICPs, we, similar to all other entities with foreign-incorporated holding company structures operating in our industry in China, operate our Internet businesses and other businesses in which foreign investment is restricted or prohibited in the PRC through wholly-foreign owned enterprises, majority-owned entities and variable interest entities. The relevant variable interest entities, which are 100% owned by PRC citizens or by PRC entities owned by PRC citizens, hold the ICP licenses and operate the various websites for our Internet businesses. Specifically, our material variable interest entities are majority-owned by Jack Ma, our lead founder, executive chairman and one of our principal shareholders, and minority-owned by Simon Xie, one of our founders and a vice president on our China investment team where he works on projects related to our China acquisition and investment activities. These contractual arrangements collectively enable us to exercise effective control over, and realize substantially all of the economic risks and benefits arising from, the variable interest entities. See “Our History and Corporate Structure — Contractual Arrangements among Our Wholly-foreign Owned Enterprises, Variable Interest Entities and the Variable Interest Entity Equity Holders.” The contractual arrangements may not be as effective in providing operational control as direct ownership. See “Risk Factors — Risks Related to Our Corporate Structure.”
The conclusion is that Jack Ma and Simon Xie own the majority share of all the Alibaba operated properties and will continue to do so post the Alibaba IPO, in-line with mandates of the PRC (People’s Republic of China). So what will shareholders who buy Alibaba stock eventually own post IPO? Let’s look into Alibaba group’s corporate structure which is displayed below.
Alibaba Corporate structure
Source: Alibaba F-1 filing
Alibaba’s corporate structure is based on a combination of Variable interest entities, wholly foreign owned enterprises, and 100% owned intermediate holding companies, which use equity interests and Contractual obligations to operate within the PRC mandates.
The Chinese online operating properties, which operate as variable interest entities (VIE), are entirely owned by Jack Ma and Simon Xie, two Chinese nationals. These Chinese companies have simultaneously entered into agreements with wholly foreign owned subsidiaries (WFOS). The WFOS are owned by Cayman Islands based Alibaba group holding limited through intermediate holding companies or direct shareholding. The contractual agreements between the Chinese companies (VIE) and the WFOS ensure that almost all of the VIE profits are passed on to the WFOS which in turn go to Cayman based Alibaba group holding limited, which will be listed on the NYSE.
The shareholders post Alibaba IPO will, therefore, have access to the profits generated by the Chinese operating company but will have no direct ownership over the Chinese based operating companies. This is a structure which has been created to operate within the Chinese regulations and any changes in these regulations could directly impact the shareholders of Alibaba group. It is better that Shareholders running for a stake in the upcoming Alibaba IPO know what they will own and consider these risks in which come along with this complicated structure. However this isn’t something which should be a cause for alarm, as large institutional investors like Yahoo and Softbank are also exposed to this risk and this is also an inherent risk in every other Chinese company listed in the US. It is only a risk investors need to understand and factor into their investment decisions.