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The risks and rewards of Alibaba’s IPO

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Alibaba ticks two boxes that get investors very excited: China and technology.

That has investors “salivating,” says Steven Davidoff Solomon, a professor at University of California Berkeley School of Law.

The massive Chinese e-commerce site Alibaba will start trading on the New York Stock Exchange Friday, using the ticker “BABA.” Shares will start at $68, the top of the company’s price range.

There are more people and companies interested in buying stock than there are shares available, but some experts advise caution.

Davidoff Solomon says investors should be aware that the deal is structured in such a way that they’re actually buying into a Cayman Islands company that will receive profits from Alibaba.

“Let’s say that Alibaba China decides just not to pay on those profits,” he explains. “Shareholders would have to sue a Cayman Islands company, gain control of it, and have that Cayman Islands company sue in China. Good luck with that.”

Second, a small group of insiders will retain control of the company and appoint directors, even though they’ll own a small percentage of its shares.

The question then is whether the price is worth these risks.

Matt Turlip, an analyst with PrivCo, has done his own valuation and thinks Alibaba’s shares are actually worth $100 each.

“It’s a giant, profitable company right now that’s growing like a startup still,” says Turlip.

So buy or buyer beware – you decide.

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