In the folk tale, Ali Baba and the Forty Thieves, Ali Baba found a pile of treasure.
In the stock market, Alibaba is the pile of treasure. Alibaba Group — the company — is like a Chinese Amazon, connecting buyers and sellers and exporters and importers. It’s valued at upwards of $150 billion. And every stock exchange in the world would love to host it.
In a post on its company blog, Alibaba says it will choose an exchange in New York. Which means it may be ditching its home stock exchange in Hong Kong. But what is a company looking for when it decides where to list?
Some stock exchanges let you have it. Some don’t.
“Hong Kong was rejected for New York, because leadership at Alibaba wants to have control over voting shares,” explains Max Wolff, chief economist with Citizen.VC, a venture capital advisory firm.
When you sell shares of your company, you’re selling control over your company. Every share can equal one vote. Votes on things like whether to fire you. Or whether to hire a board you don’t like. This is reassuring to some investors, but sometimes terrifying for management. So some companies like to weight the vote from the get-go.
“You can attach ten times the voting weight to some shares versus others,” explains Wolff, and then you save all of those special shares for yourself, giving you “super voting rights.”
That way, you could own only 5.1 percent of your shares, make a ton of money by selling the rest, and still have 51 percent of the voting rights.
One small problem: In Hong Kong, you’re not allowed to do that. Those are the rules. It’s viewed as more equitable.
But in New York, you can do that. So for Alibaba, which has a very centralized management team headed by Jack Ma, known for his “large personality,” the decision to go public in New York was a no-brainer.
But there’s more to it than just power.
Home field advantage
If you list at home, more people know you. Investors will be more comfortable with you and view you as less of a risk.
“It’s akin to a sports team playing at home,” says Scott Kessler, internet equity analyst with S&P Capital IQ.
On the other hand, listing abroad – especially in New York – can be seen as prestigious.
Pai Ling Yin is at the Stanford Institute for Economic Policy Research. She says where companies choose to list can send a message that, “We are good enough in our practices that we can withstand the scrutiny of being on a more developed and more rigorous exchange with higher standards.”
Scott Kessler says many Chinese companies in particular have been going direct to the U.S. stock markets in recent years.
A big fish needs a big pond
It is possible, of course, to list on multiple exchanges simultaneously. But it’s not advisable for a new company, says Yin, because “early on people aren’t sure of your true value, so splitting your listing across markets adds a dimension of uncertainty.”
If there’s excess supply or demand on one exchange but not the other, it can make the stock price volatile as investors try to compare the two.
“You want all the people who could buy your stock to be there” together, says Yin.
Fundamentally though, “the U.S. is still the place to be when it comes to technology companies and internet companies,” says Kessler.
And with a valuation of upwards of $150 billion, rivaling Facebook’s valuation, it helps Alibaba to be where investors are the savviest, the most numerous, and wealthy.
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