Published September, 18, 2014
In a society driven by finding the “next big thing”, are Americans jumping too far ahead by investing in Alibaba, the “next eBay”? Made up of internet based e-commerce businesses, Alibaba China has now expanded onto the global level and people are rushing to get a hold of Alibaba’s record-breaking IPO. Underwriters had the option to purchase additional shares at the IPO price of $68 while bankers bought an additional 48 million American depositary shares. Alibaba sold more shares due to its “greenshoe” option, which allows underwriters to help investor demand by getting more shares at the IPO price. These prices are proof that US shares are over-valued which could be potentially detrimental to the economy. At some point the US stock market will most likely start to fall, bringing Alibaba shareholders and the rest of the economy down with it.
Most shareholders aren’t even properly informed of what they are buying, thus oversimplifying Alibaba in a dangerous manner.
Bert Dohmen points out in Forbes that people think they are buying shares in Alibaba China when actually they are getting pieces of paper in Alibaba Holdings Cayman Islands (known as a VIE or variable interest entity). Investors aren’t getting a share in Alibaba assets or shareholder rights, only a share in the profits. This brings up the question of who is actually controlling the company and getting away with selling these VIE’s, Alibaba founder and successful Chinese CEO Jack Ma.
CEO Jack Ma has proven himself to be the most successful CEO in China as Alibaba is now the largest online merchant in the world with $240 billion in merchandise sold in 2013. The company began in 1999 when Ma created the site as a way to connect Chinese manufacturers with overseas buyers.
But Alibaba lacks independent board members. There is no supervision, no checks and balances, no way to guarantee that companies will not be defrauded enough money to cause serious damage. Ma has already made moves without included big shareholders Yahoo and Softbank, moving the payment system from a company in which the companies held shares into Alipay without consulting them and thus losing both companies significant finances. What’s stopping Ma from doing something like this again? Proponents of Alibaba keep comparing the company to that of Amazon or eBay as a means of establishing the company and the CEO’s credibility.
If we’re making this comparison however, there is something important to point out. The Economist writes that the founders of eBay used to say that their real accomplishment was neither their clever technology nor the marketplace they created. Instead, it was to build trust between people who have never met.
Can we trust Alibaba? It’s hard to tell.
The company is surrounded by controversy. Alibaba.com has a Gold Supplier membership to try to ensure that the sellers are genuine. The way this Gold Supplier program works is that traders on the website pay a fee and submit to third-party checking in order to potentially be labelled as “gold” suppliers. This let buyers know that the seller is credible.
Alibaba’s corporate office admitted in 2011 that it had granted this membership to more than a thousand dealers which turned out to be defrauding buyers. More than 100 sales staff and a number of supervisors and sales managers were directly responsible for allowing these dealers to evade controls. The firm’s shares dropped nearly 15% after the announcement. If something like this happens again, the outcome would be far more disastrous.
We need to look at what exactly is the long term success of Alibaba and if this sort of globalization is worth losing the safety and control of the American economic system.
Sources:
http://www.forbes.com/sites/investor/2014/09/19/alibaba-ipo-day-recap-run-jack-run/
http://www.economist.com/node/18233750
http://content.time.com/time/world/article/0,8599,2052971,00.html