Alibaba Group Holding Ltd (BABA)

[eastunder]

Regan: Why Alibaba IPO is such a big deal


Trish Regan, Special for USA TODAY 11:23 p.m. EDT April 22, 2014

http://www.usatoday.com/story/money/columnist/2014/04/22/regan-why-alibaba-ipo-is-such-a-big-deal/8031205/

This week, Alibaba, a Chinese Internet company many Americans have never heard of, will file for an initial public offering (IPO). It's big — potentially the biggest public offering since Facebook's inauspicious debut in 2012. It's critical to Yahoo, which owns 24% of the company. And it's got a lot of users: 500 million at last count.

Leaving those superlatives aside, Alibaba's IPO is worth paying attention to. In a market that's awash in tech IPOs (King, GrubHub and Travelocity-owner Sabre in the last month), this one is different.

Alibaba's debut has significance. It will be a critical test of the Chinese economy, the supremacy of American capital markets, and — most important — investor sentiment amid another tech boom.

We're getting ahead of ourselves. Let's meet the company first. Alibaba has been described as eBay meets Amazon meets PayPal, with Google mixed in. Here's how it works: Alibaba sells goods through a peer-to-peer marketplace, similar to eBay. Like Amazon, it sells items through larger retailers. And like PayPal, it operates an online payments service. Unlike Amazon or eBay, it makes no money off those transactions. Instead, it makes revenue off advertising, like Google. Mix in half a billion subscribers, and we get to reason No. 1 why Alibaba matters: It's a China litmus test.

Alibaba wasn't founded in Silicon Valley, though its origins sound familiar. Jack Ma, a young man with a vision, starts a business in his apartment. Through sheer force of will, technology and helpful demographics, he becomes a billionaire. Ma was a schoolteacher in 1999. Now, he's China's Mark Zuckerberg (or Larry Page or Bill Gates or Jeff Bezos).

His success, crowned by Alibaba's impending IPO, is the most public example of Chinese entrepreneurship. His ascent is a template for China's budding empire-builders, a story of Manifest Destiny inside a Communist Manifesto economy. There's hope that Alibaba will inspire a whole new generation of Jack Ma wannabes in China.


Alibaba founder Jack Ma(Photo: Peter Parks, AFP/Getty Images)


Alibaba itself is China-size. Estimates place the number of Chinese Internet users at 560 million, double those in the U.S. and growing at a faster rate; nearly all of them are Alibaba users. Alibaba has said that it accounts for more than half of all parcel deliveries in China. In 2012, the combined transaction volume totaled more than one trillion yuan, or $163 billion, more than Amazon and eBay combined.

That brings us to the second reason the Alibaba IPO matters: It's profitable. Forget pre-revenue, pre-product or triple-digit price-to-earnings ratio. Alibaba distinguishes itself from the recent batch of tech IPOs in that it is not just a cool idea, it's a money machine.

Based on filings from Yahoo, the company generated $1.4 billion in profit in its latest fourth quarter alone. Compare that with Amazon, which is not as profitable despite massive sales volume, or Twitter, which is still trying to establish how it will monetize its user base.

As tech stocks teeter between exuberance and despair, the Alibaba IPO will be a good indicator of what investors really want: a nascent start-up with an overeager investment banker or an established tech company with solid fundamentals.

The final reason American investors should focus on Alibaba is that Alibaba is focused on America. Not for its customer base, but for its deep capital markets, sophisticated financial system and hoards of institutional money.

A company as large as Alibaba could have listed anywhere in the world. But it's expected to debut on the New York Stock Exchange.

That's not entirely out of preference for our markets. U.S. law allows for the current controlling shareholders to maintain control after the IPO (similar to Google and Facebook), while China does not allow such structures.

Ultimately, the Alibaba IPO is a strong reminder to our financial rivals in Hong Kong and London that America is still the premiere IPO place.

Alibaba shows that great companies will come from far beyond U.S. shores. It would be a sad day to see an Alibaba-type company going public anywhere else.

Our tremendous acumen in finance and our capital markets are still the envy of the world.

We'd be wise to keep that advantage.