Internet company Yahoo received a huge windfall today when China-based e-commerce company Alibaba went public on the New York Stock Exchange in a $21.8bn initial public offering.
Aliaba and shareholders Yahoo and Jack Ma issued just over 320 million shares priced at $68 each. The company had initially set a range of between $60 and $66 for the offering, only to raise the high end to $68 days before it floated.
The offering is the largest ever in the US, exceeding payment services firm Visa’s IPO in 2008, which raised $19.1bn after the underwriters had exercised their over-allotment option.
The eventual price will rise to just over $25bn, making it the largest IPO in history, if the offering’s underwriters take up the option to buy a further 48 million shares, an outcome that is practically certain considering Alibaba’s stock debuted at $92.70, giving it a market capitalisation of almost $230bn.
The stake held by Japan-based telecommunications company SoftBank was diluted from 34.1% to 32.4% through the IPO, and Yahoo sold approximately 121.7 million shares, equating to a 4.9% stake and giving it a partial exit of $8.28bn.
Yahoo will retain a 16.3% share of Alibaba. Other shareholders that achieved partial exits included CEO Jack Ma, who made $867m while diluting his stake from 8.8% to 7.8%, China Investment Corporation, which made $971m, Silver Lake ($278.8m), Citic Capital Holdings ($333.9m) and Olayan Group ($34m).
Alibaba did not disclose any specific plans for the proceeds from the offering, stating only that it plans to invest the money outside of China.
The company has expanded considerably since it was founded in 2009, growing from a business-to-business trading platform to a wider-ranging e-commerce firm that also incorporates cloud computing, an online payment service called Alipay, and latterly a financial services arm.
Alibaba has recently made a series of large investments and acquisitions in a bid to grow to a more diversified internet business, buying online navigation service AutoNavi and fully acquiring mobile browser company UCWeb, in which it already held a 66% stake this year.
Other companies it has funded in 2014 include mobile communication app Tango, in which it invested $215m, ride sharing company Lyft, which raised $250m in April, financial software producer Hundsun Technologies, which received $532m, group discount website Meituan, which secured $300m in May, and mobile gaming company Kabam, in which it invested $120m.
Examined together, the list of portfolio companies and acquisitions made by Alibaba strongly indicate that its aim is to become the kind of huge internet company that can challenge the likes of Google, which already has a vastly diverse range of services, and Facebook.
Alibaba made a $3.7bn profit in the last financial year from revenues of almost $8.5bn, but is disadvantaged in that it will be coming to many markets later than its western rivals. That is why it is likely that a good portion of the IPO cash will be put towards international acquisitions, which could include India-based e-commerce company Snapdeal.
The cost of not consolidating its position and continuing to grow through external investments can be seen through the prism of Yahoo, which in contrast is unlikely to spend any of the proceeds on corporate venturing.
Yahoo was at one time one of the internet’s premier companies but its influence was already on the wane when it first invested in Alibaba in 2005 as part of a strategic agreement. Its market capitalisation has continued to dip since then as rivals such as Google and Facebook have extended themselves across the internet.
Yahoo’s chief development officer Jaqueline Reses ruled out plans for a corporate venturing unit as recently as July, citing a desire to concentrate on the company’s core business, as opposed to corporate venturing, which she described as a “hobby”.
However, Yahoo’s ‘hobby’ has just netted it a cash influx near double that of its 2013 full-year revenues, and the company’s mindset is indicative of a conservatism that has hampered its growth.
Yahoo has largely chosen to ignore corporate venturing in recent years and, its $1bn acquisition of Tumblr apart, it has mostly stuck to small-scale purchases, in contrast to those made by bigger players such as Alibaba.
Two factors stick out when looking at Alibaba’s corporate venturing deals. The first is that several of its target companies, including Tango, Lyft and Kabam, are focused on the mobile internet space.
Online business is increasingly gravitating towards mobile devices, which is why companies like WhatsApp and Instagram were acquired for sums thought at the time to be excessive. The shift could hypothetically give Alibaba, which is entering the international internet market as a relative outsider, a chance to gain a foothold over more established companies.
The second is that Alibaba is attempting to do that partly through strategic partnerships with several of its portfolio companies. It could buy them in future, as with UCWeb, or simply leverage existing partnerships to enter new sectors and geographgies more smoothly.
Yahoo, by contrast, has shown little interest in doing the same, which to give one example, is partly why Flickr, the photo sharing company it bought in 2005, ended up being rapidly overtaken by Instagram, which had a far larger mobile presence.
Yahoo may harbour a desire to stick to its core business, but that core business is diminishing, and it will need to start looking outwards for innovation if it wants to retain a seat near the top of the internet table. Alibaba is already there.