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Corporate governance after Alibaba IPO

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Corporate governance should be a concern to investors

On Friday September 19, Alibaba Group Holding Ltd (NYSE: BABA) joined the league of the world’s top conglomerates. The company had a one of kind debut after its IPO surpassed both Visa Inc’s (NYSE: VISA) and Agricultural Bank of China’s IPOs to become the largest IPO ever.

Prior to the IPO, a research had indicated that there was U.S. investor apathy arguably due to the company’s corporate governance structure. However, the company’s profitability and its market demographic countermanded this making it worth the risk. Now the IPO is gone and investors wake up to the reality that Alibaba’s corporate governance is its greatest liability.

Corporate governance and legal structure

We should not let the success of Alibaba sway us away from the underlying corporate quandary. While the company has performed exceptionally, it was then a private company. Under the public light, a lot comes into play and this is why its atypical structure came into limelight in the first place.

Some of the concerns of Alibaba’s structure revolve around two areas namely:

  • The powers of Alibaba partnership
  • The company’s VIEs structure

The power of Alibaba partnership

Alibaba partnership is a group of 27 members, including company’s co-founders and its top executives. The group nominates more than half of the board, giving it an overwhelming control over the company.

Backers of this structure will be quick to name companies in the U.S. that have done well with similar structures. Yes, the likes of Facebook Inc (NASDAQ: FB) and Google Inc (GOOG, GOOGL) have structures that impel their founders to total control positions. But remember, these are companies in a country with a good legal framework and where the rule of law prevails. Alibaba on the other hand hails from a country with an opaque economy where even social platforms such Facebook, Twitter and YoutTube are banned.

VIE Structures

Jack Ma has in the past proven that he can secretly transfer the company’s asset. He did this in 2011 when he divested Alipay without Yahoo! and SoftBank having a single clue Isn’t this a reason enough for investors to demand effective measures to tie his free hands?

Optimistic point of view

I know that the aforementioned concerns are at the back of the mind of every investor who holds Alibaba shares. Most people have decided to give Alibaba and China the benefit of the doubt.

After all, it is not totally wrong to give Jack Ma control of the company he founded from scratch. It is known that companies struggle when they sideline the company founders. Founders often have a clear picture of what they want to achieve with the company and are willing to go the extra mile to fulfil their dreams.

A good example is Apple Inc (NASDAQ: AAPL), which after sending Steve Jobs packing, had to contend with diminishing image and lack of fresh ideas to maintain the company’s name in the PC market. Steve Jobs return did not immediately reflect on the company’s performance, but it led to the company producing a revolutionary product that changed how people buy digital content.

Since Jack Ma had managed to bring Alibaba to the limelight with limited resources, he is expected to do better now that he has the backing of the stock market. And as for China, let’s pray that the Beijing may see the good in Alibaba and use it as marketing tool to make it prestigious destination for investors. Nevertheless, the success of Alibaba still heavily relies on the mercy of communist rulers of China.

Jack Ma, a Concern for U.S. Investors

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U.S. Investors Must be wary of Jack Ma

In a month’s time, Alibaba Group Holdings will open its shares for U.S. investors in a grand IPO that is expected to raise more than the $16 billion raised in 2012 by Facebook  Inc. (NASDAQ:FB). The Chinese e-commerce giant, founded and headed by Jack Ma, has already chosen the New York stock Exchange as its preferred destination under the ticker BABA.

Most analyst valuation puts Alibaba in league with the top five most valuable tech companies. Therefore, its IPO will present the U.S. investors with an opportunity to hold a large cap stock. And while everything about this Chinese conglomerate is huge, there is one pressing concern that every investor must look at with an open eye and sober mind, Mr. Jack Ma.

Jack Ma is a shareholder but an even bigger force

Ma holds 8.9% of Alibaba stake. This is a partly fraction to the 22.6% that Yahoo! (NASDAQ:YHOO) or 34.4% that Japan’s SoftBank (SFTBF) owns. Nevertheless, Ma is the most powerful shareholder and member of the board. His capabilities transcend his official title; he is a public figure and enjoys the backing of the Beijing regime.

Here is why every U.S. investor should be wary of Ma:

Ma and Alibaba Partnership

Alibaba amended its IPO filing to accommodate a strange clause that allows a committee of merely 27 partners to collectively nominate more than half of the board of directors. The shareholders then vet the nominees and can veto whoever they are not comfortable with.

However, the partners have the power to choose an alternative in acting capacity until the next AGM. It is surprising that both majority shareholders, SoftBank and Yahoo have backed this partnership. The SEC listing amendment meant that the total power of the company rested with Ma and his small clique of partners. This follows that the U.S. investors who will buy alibaba shares will have trusted this clique to make decision on anything regarding the company affairs.

Jack Ma Political Influence and Alibaba Legal Structure

Jack Ma’s political influence is another pressing concern if the legal structure is anything to go by. Interestingly, one of Alibaba’s funds is founded by the son of Wen Jiabao, a former premier.

Alibaba’s important licenses are held through variable interest entities (VIEs) to bypass the Beijing legislation on foreign ownership. He is very familiar with these structures, and that’s why he was able to divest Alipay (PayPal like payment unit) from Alibaba without Yahoo!’s prior knowledge, let alone its consent. Then Yahoo! was Alibaba’s largest foreign shareholder. His argument was that the unit needed an important license from the People Bank of China (PBC) in a moment notice.

The company’s existence in Zhejiang where China’s president, Xi Jinping, was formerly the province’s party chief, has helped Ma to enjoy Beijing’s support. This influence has helped the company overcome many obstacles that has hindered the progress of many non-state companies in China. However, this influence could play against U.S. investors should there be conflict arising from the company’s legal structure.

Conflict of Interests

As at now, Mr. Ma owns the foreign vehicle that owns both Alipay and its money-market fund affiliate. Since the two money units are still in partnership with Alibaba through complex contracts, there could be a conflict of interest in the future.

Other reasons that highlights Ma’s unilateral decision includes the recent impulse purchase of stake in irrelevant sectors such as acquiring stake in Chinese soccer team, and irregularly lending cash to one of his partners in the disguise of acquiring stake in cable TV company. There also other cases where his private equity funds has been lined up as a co-investor.

Conclusion

Jack Ma founded Alibaba and he has been the force behind it since its inception. He has watched the company grow from just one platform, Taobao, to multiple platforms with almost 85% control of the world’s largest e-commerce market. The company’s quarterly revenue (2014 Q1) stands at $1.5 billion, an increase of about 39% a year earlier.  It would be ridiculous to question Ma’s leadership given this success. However, company is now going public and a public company would want a leader who serves the best interests of its shareholders. Can Jack Ma do that?

Jack Ma Does it Again

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Jack Ma and His Partners Now Have the right to expand board

Alibaba IPO has gained media attention for a while now, and everyday the company moves close to its New York stock exchange debut date. The company has just amended its Securities and Exchange Commission filing, and the amendments include its estimated valuation which has swollen from at least $116 billion to about $130 billion now.  However, what has caught the eye of many stakeholders is the clause that gives Alibaba partnership the right to add two more board members.

Amended SEC listings aside, you must have heard an outcry about certain aspects of Alibaba Group Holding Ltd. Prior to this amendment, the company was structured such that Alibaba partnership, which is a group of 27 top executives and investors, including Jack Ma, would appoint at least four of the nine directors to the board. The amendment revealed on Friday in the U.S. regulatory filing  now brings the board members to 11.

The Chinese ecommerce giant is only a couple of weeks away to debut in the U.S. stock market. This debut is expected to trounce Facebook Inc.’s IPO as the largest technology IPO in history. It might as well go down in history as the largest initial public offer ever seen in the world.

Jack Ma and Partners

The economist published an article on July 13 claiming that Jack Ma had opted to list in the U.S. in place of Hong Kong, not because the former is superior, but because it accepts dual-share structures that tech entrepreneurs use to retail control in their co-founded companies.

Alibaba’s share structure has been questioned severally; however, nothing seems to happen. Instead, it is getting worse. The SEC listing amendment has handed total power to the company’s founder and chairman, and a small clique surrounding him. It is claimed that Hong Kong had refused to allow this structure, which gives control to only a small group of people in a company as big as Alibaba.

Ma, formerly an English teacher, founded Alibaba in his apartment back in 1999. Though he did not know match about writing codes, with the help of partners this company has since grown and diversified its products to include even financial investment. And while his contribution to this company is unmatched, and devotion unquestionable, the multifaceted governance structure employed by Ma and his partners is a serious concern to investors.