Never mind Twitter; the biggest initial public offering on the horizon is Alibaba.
The company, a Chinese Internet behemoth, appears to be playing a game of global regulatory arbitrage, with suggestions that it may go public in New York if it can’t get its way in Hong Kong.
A core group of 28 Alibaba executives known at the company as partners and led by Jack Ma want a corporate structure â€" as Google, Facebook and other United States companies have â€" that would allow them to keep control of the company after the I.P.O.
The Hong Kong Stock Exchange, however, doesn’t allow dual classes of stock and other types of mechanisms to preserve corporate control. Despite persistent complaints that Washington regulations hamstring companies that want to go public â€" witness the push for last year’s the Jump-Start Our Business Startups Act, or JOBS Act â€" in this case, the United States has become the place to avoid more stringent regulation.
Alibaba still wants to mimic those American technology companies and has proposed a way to circumvent the Hong Kong requirement. According to a spokesman for the Internet company, it has explored with the Hong Kong Stock Exchange “a waiver to permit a listing that allows a group of senior leaders who have formed a partnership inside the company†the right to nominate a simple majority of the board. This person also added that “all other shareholder rights remain intact, including the right to elect or reject the entire board.â€
As for an I.P.O., when I asked Alibaba about the subject, the representative stated that “at this time, we have no timetable for an I.P.O., we have not hired underwriters, and we have not selected a location.â€
The Hong Kong Stock Exchange has not publicly responded to Alibaba, but this clearly puts the exchange in a pickle. The Alibaba offering is expected to raise as much as $15 billion, creating a public company with a $70 billion market value. The fees for bankers and lawyers will be equally enormous. The I.P.O. will be a must-get for the exchange.
The worry is that if the exchange does not grant a waiver for Mr. Ma’s corporate structure, Alibaba will go to New York.
It’s not an idle threat. When the English soccer team Manchester United was unable to get a waiver from the Hong Kong and then the Singapore exchanges for a dual class structure, it instead went to the New York Stock Exchange.
In a memo to Alibaba’s employees a few weeks ago, Mr. Ma wrote that “we are not concerned about where to go public, but we do care that wherever we end up going public must support this type of open, innovative, responsible culture that values long-term development.â€
That sounds as if Alibaba is prepared to go to New York.
As the case of Manchester United illustrated, the United States has become the place where foreign companies come when they don’t want regulation that is too onerous. This is despite the fact that the United States is still criticized as a country too litigious to list.
Over the last decade, culminating in the JOBS Act, the regulations imposed on foreign companies listing in the United States have been substantially reduced. The end result is that these companies do not need to prepare financial statements in accordance with federal accounting rules, file quarterly reports, proxy statements or make the same compensation disclosure that American companies do. In addition, structures like dual-class shares are permitted when they are barred on most other major exchanges.
Deregulation has helped the United States maintain its pre-eminence in the competition for global I.P.O.’s, but perhaps at a price. Take for example Chinese I.P.O.’s generally. The Hong Kong exchange requires companies to have three years of operating results to be judged suitable for listing. As a result, many Chinese companies in recent years came to the United States, where this requirement did not exist. This ended badly as more than a hundred Chinese companies with I.P.O.’s in the United States subsequently collapsed, some amid accusations of fraud. In at least one case, that of ChinaCast Education, the founders simply took the company’s assets when American shareholders gained control of the company’s board.
The strange twist in all this is that much of the deregulation in the United States was a consequence of a faulty assumption that this country was losing I.P.O.’s and changes were needed so we could better compete.
But the United States has always been the leader. Today, Hong Kong has only 88 foreign listings, while the United States had 806 foreign listings last year, up 8 percent from 2007, according to the World Federation of Exchanges. Britain, the closest competitor, had 576 foreign listings last year, down 17 percent from 2007.
Which brings us back to Alibaba. The company is undoubtedly seeking this structure for the same reason that other technology companies have it â€" allowing it to preserve an important founder culture.
This idea is subject to some dispute. Founder-controlled companies may indeed benefit, but some argue that it entrenches companies’ executives, preventing change to occur when it is most needed and stifling the development of future leadership. Studies have also shown that dual-class structures are more likely to benefit the controlling shareholders and that returns for these companies lag. (The New York Times, like other media companies, also has a dual-class structure).
In the case of Alibaba, the company is a complex organization with more than 20 different operating companies and a powerful executive in Mr. Ma. This may mitigate stronger transparency and minority protections for shareholders. In response, Alibaba has strongly emphasized its culture, which is modeled on other partnership cultures like Goldman Sachs. Also to be fair to Alibaba, the structure the company is proposing is not as harsh as a conventional dual-class stock, instead giving some power to shareholders to reject the election of directors, something that Facebook and others have not done.
The bigger issue is that Alibaba’s I.P.O. governance machinations raise the problem, and perhaps the promise, of globalization. You can argue about whether dual-class stock and other governance mechanisms that give control to founders and executives are good or bad, but it is clear that the threat of this competition has been ably used by Washington to water down its own regulation.
And that is now having a global effect as it pushes other countries to re-examine their standards. Again, if you think that this deregulation is a good thing and merely frees up companies, you should be happy. There are probably regulations that were an unnecessary burden.
But one could argue the flip side: that the United is pushing global listings standards down.
It may turn out that Alibaba gets what it wants from the Hong Kong Stock Exchange. Other factors â€" like Chinese government and the location of its business â€" could also push the company to stay in Hong Kong. But the battle for Alibaba’s listing shows that as more big companies go global, the exchanges are going to be increasingly played off one another over which one has the better regulation for companies.
Unfortunately, this may be a race to the bottom â€" with the United States leading the way.
