Alibaba goes public case study

Case Study

1. Describe dual-class share structure. Is Alibaba’s (ALB) ‘partnership structure” different from dual-class share structure? Deas “voting premium” mean that “minority” shareholders are losing money?

2. Why do NYSE and NASDAQ allow dual-class share structure while HKEx does not?

If you were Charles Li, what would you do?

3. What are the pros and cons of listing in Hong Kong versus New York? If you were Jack Ma, where would you list? Under what conditions?

4. What is your valuation of Alibaba?

ALIBABA’S IPO DILEMMA: HONG KONG OR NEW YORK? Emir Hrnjić wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to protect confidentiality. Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmission without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Richard Ivey School of Business Foundation, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail cases@ivey.uwo.ca. Copyright © 2014, National University of Singapore and Richard Ivey School of Business Foundation Version: 2018-09-18

Alibaba Group’s founder, Jack Ma, was named the Financial Times’ 2013 Person of the Year, joining the likes of Steve Jobs, Barack Obama and Google co-founders Sergey Brin and Larry Page. Even though Jack Ma had experienced a cult-like following in China similar to that of Steve Jobs in the United States, he was relatively unknown outside of China. Only after Alibaba Group started its preparations for the long-awaited initial public offering (IPO) and began negotiations with different stock exchanges, did this vivacious leader start making global headlines. While Jack Ma had been receiving most of the press attention, Alibaba’s executive vice-president, Yale-educated Joe Tsai, led efforts for Alibaba’s IPO.1 In April 2014, Tsai faced several decisions regarding the IPO. Should Alibaba maintain its rigid stand on its proposed governance structure despite resistance from the Hong Kong Stock Exchange? When would be the best timing for its IPO? How should the company price its shares in one of the most anticipated IPOs of the 21st century? ALIBABA GROUP2 By early 2014, Alibaba Group had emerged as one of the world’s leading e-commerce companies with 24,000 employees located in China, India, the United States, the United Kingdom and Singapore. Two of the more successful businesses within Alibaba Group, Taobao.com and Tmall.com, became China’s most popular consumer-to-consumer (C2C) and business-to-consumer (B2C) online shopping destinations, respectively. In fact, the gross merchandise volume (GMV) of these two businesses exceeded RMB1 trillion (US$164 billion3) for the year ending March 31, 2013. This accounted for 80 per cent of the entire B2C and C2C e-commerce in China ($204 billion in 2012), and was larger than Amazon ($86 billion) and eBay ($67.8 billion) combined. Other aspects of Alibaba’s business included online payment systems, cloud computing and mobile Internet services. Alibaba’s ascent began in 1999, when Jack Ma, then an English teacher, shared his vision with Alibaba co-founders in his apartment. Alibaba Group utilized a simple business model of creating a platform for buyers and sellers to meet and transact. It was founded on two major insights: the cost-consciousness and importance of trust for Chinese consumers. Alibaba catered to the cost-consciousness of the Chinese population by making membership free.4 Thus, while buyers and sellers could use Alibaba for free, the

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Page 2 9B14N035 sellers had to advertise heavily in order to attract customers, which generated large advertising fees for Alibaba. Alibaba also catered to the importance of trust by providing tools to build trust between buyers and sellers. It did so through an independent verification service, as well as the Alipay payments system (similar to PayPal), which placed monies received in an escrow account.5 By tailoring its business model to these observations about its customers, Alibaba turned out to be extremely successful. One analyst described Alibaba as a mixture of “retailers like Amazon and eBay, financial services like PayPal and a search engine giant like Google.”6 Jack Ma explained the philosophy behind his direction for Alibaba in the following words: “I always believed we shouldn’t build an ‘empire,’ instead, we should build an ‘ecosystem.’ Every empire will be toppled someday, but an ecosystem is sustainable.”7 E-Commerce in China Analysts estimated that China’s online retail market would rise to 9 per cent of China’s RMB31.5 trillion ($5.17 trillion) retail market by 2015, and to 25 per cent by 2028.8 Furthermore, The Economist predicted that by 2020, Chinese e-commerce would surpass that of America, Britain, Japan, Germany and France combined.9 The world had great expectations for the Chinese e-commerce market, where Alibaba was poised to be a dominant player. Alibaba’s Competition China was becoming increasingly tech-savvy, with the number of Chinese Internet users estimated to be 612 million in 2014.10 Alibaba’s Tmall controlled the market share of roughly 50 per cent in the B2C market, while Taobao controlled more than 90 per cent in the C2C market. Within the B2C market, the closest competitors JD.com and electronics specialist Suning enjoyed 13 per cent and 3 per cent of the market share, respectively.11 Within the C2C market, Paipai (owned by Tencent) came in a distant second (see Exhibit 1). Alibaba did not perceive U.S. competitors such as Amazon, eBay and Google to be major threats. The lack of serious competition was partially due to restrictive Chinese Internet laws. For instance, Internet users in China were under the Golden Shield Project, colloquially known as “the Great Firewall.”12 Following tensions over Tibet, Chinese government expressly banned Internet users’ access to Facebook, YouTube and Twitter.13 Among local competitors, Alibaba fiercely competed with Tencent, which had a market capitalization of $110 billion. Another Alibaba competitor, Baidu, the largest Chinese search engine with a market capitalization of $60 billion, accounted for nearly 80 per cent of the search market in China.14 Acquisition Spree In June 2010, Alibaba’s acquisition of California-based e-commerce software firm Vendio represented the company’s first attempt to expand the company’s B2B2C model in the United States.15 Alibaba projected that Vendio’s customer base, consisting of 80,000 small U.S. businesses, would source products from Alibaba’s supplier network and then resell them through eBay, Amazon and other online stores.16 Alibaba continued to acquire more U.S. companies in subsequent years. In June 2013, Alibaba bought a minority stake in Fanatics Inc., an online retailer of official licensed sports merchandise with $1 billion in annual revenue.17 Four months later, Alibaba invested in ShopRunner, an e-commerce website that offered, in exchange for a small annual fee, unlimited two-day shipping from a number of retailers such

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Page 3 9B14N035 as GNC, Nine West and Tommy Hilfiger.18 At the time of the acquisition, ShopRunner was valued at about $600 million.19 Even though Amazon’s 10 million members dwarfed ShopRunner’s membership of one million,20 analysts perceived these acquisitions as Alibaba’s attempt to compete with Amazon on its home turf. Alibaba remained active in the acquisition market in China as well. In April 2013, the company bought an 18 per cent stake in Sina Weibo for almost $600 million.21 Alibaba and Weibo expected their partnership to generate $380 million in advertising revenues by 2016.22 A month later, Alibaba invested $294 million in AutoNavi, the Chinese equivalent of Google Maps and China’s top online mapping company. While Alibaba could use AutoNavi in different ways, such as location-based marketing, the most immediate benefit to Alibaba was AutoNavi’s 100 million users on its mobile apps.23 In September 2013, Alibaba Group acquired the cloud storage service Kanbox (the Chinese equivalent of Dropbox with more than 15 million users).24 However, Alibaba did not stop at Internet acquisitions. Ma said: “The new economy is not the digital economy, but rather, one that combines the real economy and digital economy, a true blending of ‘virtual’ and ‘real.’”25 In December 2013, Alibaba formed a strategic partnership with Haier, whose subsidiary, Goodaymart, owned nine shipping bases, 90 logistics delivery centres and 2 million square metres in warehouse space across China.26 This acquisition appeared to be consistent with Alibaba’s strategy of investing in distribution networks, instead of building and developing its own. In 2014, Alibaba completed several acquisitions, including a purchase of a minority stake in Intime Retail Group (which owned 36 department stores and shopping centres in China) — in an apparent plan to merge its e-commerce business with its retail business27 — and a 60 per cent stake in the Chinese entertainment company ChinaVision.28 IPO PLANS Alibaba needed money to fund further acquisitions and the impending IPO was supposed to generate proceeds for this purpose. In May 2013, Ma announced that Alibaba was ready for an IPO.29 The Hong Kong Stock Exchange (HKEx) seemed to be a natural fit for Alibaba’s public offering. Even though Alibaba prided itself on being a global company, the majority of its business revenues were generated within China. Furthermore, most Hong Kong investors were familiar with Alibaba’s business as they had used Alibaba’s services before. Overall, proximity, culture and language of Hong Kong investors appeared to make HKEx the favoured choice over other global exchanges. Trading Location Some argued that the listing destination should be irrelevant for such a decision. Indeed, if world stock exchanges were fully integrated, there should be no pricing differences for the same stock in different trading locations. One principle of finance was that the fundamental company value should be determined by the present value of the company’s cash flows discounted at the appropriate discount rate (determined by risk profile of these cash flows).30 In this case, global investors would value Alibaba’s underlying business and, consequently, the price of the shares would fully incorporate these estimates. Thus, in a frictionless world, valuations should depend solely on the company and not on the trading location. In other words, Alibaba’s shares would theoretically have the same price regardless of a listing in Hong Kong or in New York.

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Page 4 9B14N035 In contrast, academic research argued that trading location may influence pricing. Extant literature presented the evidence of frictions between exchanges, thus causing shares to be priced differently depending on their trading locations. For instance, prices of U.S.-traded foreign country funds were sensitive to the market movement in the U.S. market, even though their net asset values were completely determined by the asset values that were outside of the United States. Another seminal study found that prices of “twin stocks, which have nearly identical cash flows, [moved] more like the markets where they trade most intensively.”31 This evidence indicated that international markets were segmented.32 Proximity and familiarity of investors thus seemed to be important determinants in stock valuation. Dual-Class Ownership Structure Tensions between HKEx and Alibaba began to emerge as Alibaba insisted on having a partnership governance structure. This resembled dual-class share structure, which was not consistent with HKEx’s “one share, one vote” policy and was therefore not allowed for companies listed on HKEx. The dual-class share structure meant that different share classes could have different levels of control over the company. There were three major ways in which one class of shares could have greater control, as compared to another class of shares within the same company.33 First, one class of shares may have exclusive rights to control the composition of the board, while another class could have no voting power at all. Secondly, one class of shares may have a higher voting power per share as compared to another class. For instance, class B shares could have 10 times the voting power of class A shares. Finally, one class of shares may have the exclusive right to vote for a fixed number or percentage of directors, while the voting power of the other classes of shares may be limited to the rest of the directors only. This differential in voting power created a mismatch between cash flow rights and voting rights. It enabled the minority shareholders to exert disproportionate control over the company (see Exhibit 2). In companies with dual-class share structure, control typically resided with founders and top executives of the company. Such structures were commonly found in Internet companies such as Facebook, Google and LinkedIn.34 The media industry, comprising companies such as CBS, Discovery and the New York Times, was also fond of dual-class share structure.35 Proponents of the dual-class share structure argued that it allowed founders to maintain a long-term view because it insulated the top executives from the myopic Wall Street mentality of investors who were more likely to be primarily concerned with quarterly earnings. It also incentivized the founders to take their companies public at an early stage, without fear of losing control.36 Moreover, the dual-class share structure was also more transparent than many other ways of retaining founder control, such as pyramid ownership or cross-shareholdings, which were frequently employed in some countries such as Korea and Japan. Those against the dual-class share structure argued that it was not fair to ordinary shareholders. The imbalance in voting power could allow executives to entrench themselves, consume extravagant perks and take unnecessary risks — all while bearing disproportionately fewer consequences of their actions. HKEx’s Position In 2013, different exchanges around the world had different views regarding dual-class share structure. For instance, U.S. exchanges such as the New York Stock Exchange (NYSE) and NASDAQ allowed listed companies to have a dual-class share structure. In contrast, the United Kingdom discouraged such

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Page 5 9B14N035 structures, while Asian exchanges such as China, Japan and Singapore banned them.37 Technically, HKEx allowed dual-class share structure in “exceptional circumstances,” but this provision had never been used. The Hong Kong Securities and Futures Commission firmly rejected Alibaba’s proposal, maintaining that there would be no exceptions to its “one share, one vote” policy. Charles Li, the chief executive of HKEx, articulated his opposition to Alibaba’s proposed governance structure in a widely read “dream post” on his blog on September 24, 2013. In his post, Li elaborated on different perspectives regarding the issue. The first perspective propagated status quo and followed the maxim, “If it isn’t broken, why fix it?” However, most other exchanges in the world permitted dual-class structure to protect company founders’ visions. Ultimately, sophisticated investors were expected to incorporate governance differences in their valuation of these companies; they could value them at a discount. Li argued that the disclosure regime worked in the United States because its aggressive litigious culture provided checks and balances, and deterrents against abuse of the system.38 Alibaba’s Reaction The day after the publication of the blog, Tsai replied to elaborate on the proposed “partnership structure” that Alibaba preferred. The partnership structure would operate to allow the firm’s senior management (of 28 persons) to nominate a majority of candidates for the board of directors, which would be then voted upon by the shareholders.39 Alibaba wanted its partners to set the company’s strategy without having to concern themselves with potentially fickle-minded and short-sighted public investors. Tsai thus argued that this structure would be in the long-term interest of all shareholders. He also added that the partnership structure would safeguard the Alibaba culture and sustain the innovation necessary to keep the company running. At the end of his post, he appealed to HKEx to consider the proposal. Alibaba obtained the approval of its main shareholders to utilize a partnership structure. SoftBank’s president, Masayoshi Son, representing the largest shareholder with 37 per cent of the company, said: “Alibaba has built a phenomenal business and created tremendous value for its shareholders over the years. Alibaba’s special culture is at the heart of its success and preserving it will be very important going forward.”40 Yahoo!, the second largest shareholder with 24 per cent of the company, similarly supported the proposed partnership structure. Jacqueline Reses, chief development officer of Yahoo! and a director of Alibaba said: “Yahoo! believes that management’s efforts reflect the desire to govern the company for long-term success while also balancing the rights of shareholders.”41 Other shareholders such as Temasek Holdings and China Investment Corporation did not voice objections. Alibaba’s Next Step Alibaba understood its importance to HKEx. For instance, another Chinese Internet giant, Tencent, had been listed on the HKEx in 2004, and had been accounting for roughly 3 per cent of HKEx’s daily trading volume.42 While Alibaba would not contribute much regarding annual fees, it had a potential to add an even higher percentage to HKEx’s daily trading volume. When the negotiations with HKEx failed, Alibaba moved on to negotiate with NASDAQ and NYSE. Indeed, many Chinese companies, such as Baidu and Renren, had already taken that path. NASDAQ and NYSE had been competing for new listings and Alibaba’s listing had the potential to provide advantage in the battle for a likely revival of Chinese IPOs.43 In October 2013, both NYSE and NASDAQ confirmed they would allow Alibaba to list with its proposed partnership structure.44 Li posted another opinion piece hinting that HKEx would be willing to consider

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Page 6 9B14N035 the public debate about alternative governance structures. The next day, Alibaba signaled that it would be willing to reconsider a listing in Hong Kong, if HKEx would change its mind or consider a compromise.45 On January 9, 2014, the Wall Street Journal reported that HKEx was ready for the public debate on allowing the listing of companies with different ownership structures.46 IPO MARKETS Hong Kong and New York The HKEx website stated that its mission was to be the global exchange of choice for Chinese clients and international clients who were seeking exposure to the Chinese market.47 Yet in the early 2000s, there remained a trend of Chinese companies who preferred to list in the United States. In 2010 alone, 41 Chinese companies went public in the United States, accounting for 26.6 per cent of all U.S. deals in that period.48 This naturally begged the question of why these companies had decided to list in the United States. First, they seemed to face an obstacle in the form of HKEx’s strict requirement that a private company had to post three years of profits before being listed.49 In contrast, U.S. exchanges did not have that requirement.50 Since many Internet companies did not have profits when they wished to go public to raise funds, the three-year profit requirement resulted in many high-tech companies opting to list in the United States, particularly on NASDAQ. Furthermore, companies believed that listing on U.S. exchanges would give them better visibility. U.S. exchanges also had an unmatched size and depth when compared to other global exchanges. Despite having more retail investors and family-run businesses in its listings, the level of legal protection that HKEx gave its investors did not seem to be as strong as in the United States. On the other hand, class action suits happened more frequently in the United States and this made litigation cost much higher than that in Hong Kong. Furthermore, compliance costs were higher and the Sarbanes-Oxley Act created additional requirements for companies that were listed in the United States.51 Also, Hong Kong investors were more familiar with Chinese companies. Moreover, after the scandals with China Media Express Holdings, Sino-Forest and other fraudulent Chinese companies that had been listed in the United States and Canada, many U.S. investors lost confidence in the accounting practices of Chinese companies (see Exhibit 3). Differences in IPO Process Since the 1990s, there had been a strong global trend of using the “book building” method of going public, especially in the United States.52 Global exchanges differed not only in institutional arrangements, but also regarding details of the process of going public. First, the IPO price in the United States could be freely determined and more than half of U.S. IPOs were priced outside the initial price range.53 In contrast, the price in Hong Kong was strictly limited to lie within the initial range.54 Second, in Hong Kong, retail investors were typically allocated 10 to 15 per cent of each IPO, but this fraction could go as high as 50 per cent if public demand was strong. In contrast, U.S. underwriters preferred to allocate shares to institutional investors. Third, pre-marketing an IPO in Hong Kong could start even before issuing a prospectus, while underwriters in the United States were not allowed to start collecting information about potential demand before filing with U. S. Securities and Exchange Commission (SEC).55 Finally, investment banking fees for medium- and large-sized IPOs ($25 to 250 million) were almost always 7 per cent in the United States; however, these fees were much lower in Hong Kong (2.5 to 3.5 per cent).56

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Page 7 9B14N035 VALUATION For the quarter ending March 31, 2013, Alibaba reported $1.38 billion of revenue and $668.7 million of net income according to Yahoo!’s 10-Q.57 In the second quarter of 2013 (ending June 30, 2013), Alibaba revenues reached $1.74 billion. This was an increase of 61 per cent, as compared to the same period in the previous year. Net income also increased 159 per cent to reach $707 million.58 In the third quarter of 2013 (ending September 30, 2013), the company reported $1.81 billion in net revenue, similar to the same period last year. Alibaba’s financial statements are presented in Exhibits 4, 5 and 6. In comparison, Amazon’s 2013 sales reached $15.7 billion with a profit margin of 0.5 per cent.59 EBay’s revenues were $3.88 billion, with a net profit of $640 million.60 Twitter disclosed $422 million in 2013 revenues, and a net loss of $134 million.61 In 2014, Alibaba was expected to earn revenues of $8.6 billion and net income of $3.5 billion.62 Alibaba chief executive officer Jonathan Lu expected Alibaba to overtake Wal-Mart in revenues by 2016, when the total value of transactions should reach RMB3 trillion ($490 billion).63 In January 2014, Yahoo! reported that Alibaba’s third quarter net income increased by 12 per cent to $792 million, while revenue increased by 51 per cent to $1.78 billion (compared to the previous quarter).64 This was in comparison to the previous year, when Alibaba’s profit doubled in the quarter ending in December 2012, tripled in the quarter ending in March 2013, and doubled in the quarter ending in June 2013.65 Over the same period, Facebook posted net income of $422 million, while Yahoo! posted net income of $297 million. Market conditions appeared to be on the upswing. The NASDAQ index went up 38.3 per cent in 2013.66 In the same year, the Hang Seng Index increased by 2.9 per cent, led by the information technology sector with the upswing of 70 per cent.67 The shares of Chinese companies were rising, regardless of whether they were listed in the United States or in Hong Kong. The U.S. Internet stocks were also doing well. Facebook had a rocky start after going public, but eventually recovered. In contrast, Twitter started with a first day return of 73 per cent and had continued to rise ever since. At the same time, several Chinese tech companies such as Qunar and 58.com already filed for IPOs on the NYSE (see Exhibit 7). However, nothing exemplified the volatility of investors’ appetite for Chinese stocks as much as two major events. “Chinese Amazon” JD.com’s sales had risen 96 per cent in 2012, and 68 per cent (to $11.5 billion) in 2013, but the company posted a net loss of $8 million in 2013. Yet, its IPO was strongly oversubscribed and the price jumped from $19 to $21.75 on the first day of trading.68 On the other hand, the world’s largest pork-producing company, WH Group, cancelled its IPO on HKEx due to the weak investors’ demand, even though the company reduced its offering size by more than a half.69 EPILOGUE Tsai faced many difficult decisions. Listing in Hong Kong or listing in New York — each had its own pros and cons. While the Hong Kong investors knew Alibaba’s business better, New York investors valued Internet companies at higher multiples. Listing in Hong Kong would be a problem if HKEx refused to compromise its stance against companies with a dual-class structure. Moreover, Alibaba had to consider its valuation and IPO price: a lower IPO pricing would leave the “money on the table” but create buzz about the company, while a higher IPO price would result in more proceeds but risk alienating investors. Alibaba’s IPO timing remained another unresolved issue.

The authors would like to thank the Centre for Asset Management Research & Investments (CAMRI), NUS Business School for its donation to this case.

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EXHIBIT 1: ALIBABA’S MARKET SHARE (2013)

B2C (%) C2C (%) Mobile (%) Online Payment (%)

Tmall 49.08 TaoBao 92.59 TaoBao 81.45 Alipay 49 JingDong 18.16 Paipai 5.56 JingDong 6.67 Tenpay 20 Tencent B2C 5.68 Eachnet 1.85 Malmaibao 1.11 Unionpay 10 Suning 4.30

Suning 1.01 Others 21

Amazon China 2.72

Amazon 0.84 Dangdang 2.12

Others 8.92

Others 17.94

Source: A. Damodaran, “Musings on Market, Alibaba: A China Story with a profitable ending?,” May 8, 2014, http://aswathdamodaran.blogspot.sg/2014/05/alibaba-china-story-with-profitable.html, accessed June 16, 2014.

EXHIBIT 2: DUAL-CLASS FIRMS IN S&P 1500 COMPOSITE (SELECTED)

Name Index Industry Ownership AMC Networks Inc. S&P 400 Media The Dolan family controls the Class B shares, which

are entitled to elect a majority of the directors. Berkshire Hathaway Inc. S&P 500 Insurance Class A: 1 vote; Class B: 1/10,000 of a vote. CBS Corporation S&P 500 Media National Amusements owns approximately 79.1% of

the voting stock. Comcast Corporation S&P 500 Media The Roberts family controls a non-dilutable one-third

stake in the firm. Discovery Communications, Inc.

S&P 500 Media John Malone owns 92.7% of Class B shares and holds 30% of the voting power.

DreamWorks Animation SKG, Inc.

S&P 400 Media Jeff Katzenberg controls 67% of the voting power.

Ford Motor Company S&P 500 Automobiles & Components

The Ford family controls 40% of the voting power.

Google Inc. S&P 500 Software & Services

Co-founders control 48.4% of the voting power.

News Corporation S&P 500 Media The Murdoch family controls 39.7% of Class B stock, the only class with voting rights.

The Boston Beer Company, Inc.

S&P 600 Food Beverage & Tobacco

CEO Koch owns all Class B shares, which entitle him to elect five of eight directors.

The New York Times Company

S&P 500 Media Members of the Ochs-Sulzberger family are entitled to elect a majority of board members.

The Washington Post Company

S&P 400 Media Members of the Graham family are entitled to elect 70% of the directors.

Viacom Inc. S&P 500 Media Sumner Redstone controls nearly 80% of the only class of shares entitled to vote.

Source: “Controlled Companies in the Standard & Poor’s 1500: A Ten-year Performance and Risk Review,” IRRC Institute/ISS, October 2012.

INTERNET COMPANIES Facebook Inc. Mark Zuckerberg holds 28.4% of Class B shares with 10 times the voting power of Class A

shares. Google Inc. Co-founders Sergey Brin and Larry Page control the Class B stock with 10 votes per share

compared to Class A with one vote and class C with no voting power. LinkedIn Inc. Co-founder and chairman, Reid Hoffman, holds Class B shares with 10 votes per-share as

compared to Class A shares with one vote. Sources: www.insidefacebook.com/2012/02/01/heres-facebooks-cap-table-with-ownership-for-zuckerberg-other-early- investors/, accessed January 27, 2014; S. Davidoff, “New Share Class Gives Google Founders Tighter Control,” New York Times, April 13, 2012; S. Davidoff, “Plans for LinkedIn’s I.P.O. May Make Few Friends,” New York Times, May 10, 2011.

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EXHIBIT 3: LISTING REQUIREMENTS IN HONG KONG AND NEW YORK EXCHANGES The HKEx Main Board listing requirements

Financial performance (Must fulfill 1 of the 3 test)

Profit test Recent past year’s net profit greater than HK$20 million Preceding two years combined net profit greater than HK$30 million

Market capitalization/ revenue test/ cash flow test Market capitalization of at least HK$2 billion at listing Recent past year's revenue of at least HK$500 million Aggregate positive cash flow from operating activities for past three years of at least HK$100 million

Market capitalization/ revenue test Market capitalization of at least HK$4 billion at listing Recent past year’s revenue of at least HK$500 million 1,000 shareholders or above at listing

Operating history, management, and ownership

Under the management continuity for the past three financial years Most recent financial year under same ownership and control

Minimum market capitalization and number of shareholders

Total market capitalization of at least HK$200 million at the time of listing (if applying through the profit test requirement) Market capitalization of at least HK$50 million held by the public at the time of listing At least 300 shareholders at the time of listing

Public float At least 25% in public hands at all times The class of securities for which listing is sought must not be less than 15% of the total issued share capital, with minimum market capitalization of HK$50 million Public float can be lowered 15% if market capitalization is more than HK$10 billion at the time of listing at the discretion of the Exchange The three largest public shareholders cannot hold more than 50% of the securities in public hands

NYSE listing requirements

Round lot holders1 or Total shareholders together with Average monthly trading volume (for the most recent six months) or Total shareholders… together with Average monthly trading volume (for the most recent 12 months)

US$2,000 US$2,200 100,000 shares 500 100,000 shares

Public shares outstanding2 1,100,000 Market value of public shares US$60,000,000 Net tangible assets US$40,000,000 Pre-tax income for most recent year Pre-tax income for each of the two preceding years Aggregate pre-tax income for past three years Aggregate pre-tax income for companies with not less than $500 million in global market and $100 million revenues in the most recent 12 months Aggregate operating cash flow for three years (each year must report a positive amount)

US$2,500,000 US$2,000,000 US$6,500,000 US$4,500,000 US$25,000

1 Round lot holders are holders of 100 shares or more. 2 In connection with IPOs, the NYSE will accept assurance from the company’s underwriter that the offering will meet or exceed the exchange’s standards.

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Page 10 9B14N035

EXHIBIT 3 (CONT’D): LISTING REQUIREMENTS IN HONG KONG AND NEW YORK EXCHANGES

NASDAQ National Market listing requirements

Option 1 Option 2 Option 3 Stockholders’ equity US$15 million US$30 million N/A Market capitalization1 or Total assets and Total revenue

N/A

N/A

US$75 million or US$75 million and US$75 million

Income from continuing operations before income taxes (in the latest fiscal year or in two of the last three fiscal years)

US$1 million

N/A

N/A

Publicly held shares2 1.1 million 1.1 million 1.1 million Operating history N/A 2 years N/A Market value of publicly held shares US$8 million US$18 million US$20 million Minimum bid price US$5 US$5 US$5 Shareholders (round lot holders)3 400 400 400 Market makers 3 3 4 Meets corporate governance requirements Yes Yes Yes

1 For a company to meet the requirements of Option 3, it must either satisfy the market capitalization requirement or else satisfy both the total assets and the total revenue requirements. 2 Publicly held shares: Total shares outstanding less any shares held directly or indirectly by any officer or director of the company and by any other person who is the beneficial owner of more than 10% of the total shares outstanding. 3 Round lot holders of 100 shares or more. Source: “Strategies for Going IPO,” Deloitte, 2007.

EXHIBIT 4: ALIBABA’S INCOME STATEMENT (2014)

Consolidated statements of operations data Year ended March 31, Nine months ended December 31, 2010

(1) 2011 (1) 2012 2013 2012 2013

RMB RMB RMB RMB US$ RMB RMB US$ (in millions, except per share data) Revenue China commerce 3,716 7,665 15,637 29,167 4,692 21,925 35,167 5,657 International commerce 2,620 3,433 3,765 4,160 669 3,117 3,557 572 Cloud computing and

Internet infrastructure 144 425 515 650 105 484 560 90 Others 190 380 108 540 87 317 1,189 192

Total 6,670 11,903 20,025 34,517 5,553 25,843 40,473 6,511 Cost of revenue (1,634) (3,497) (6,554) (9,719) (1,563) (7,442) (9,899) (1,592) Product development expenses (1,135) (2,062) (2,897) (3,753) (604) (2,899) (3,893) (626) Sales and marketing expenses (2,335) (3,154) (3,058) (3,613) (581) (3,092) (3,267) (526) General and administrative expenses (1,000) (1,724) (2,211) (2,889) (465) (2,344) (3,704) (596)

Amortization of intangible assets (131) (144) (155) (130) (21) (105) (197) (32) Impairment of goodwill and intangible assets (1,308) — (135) (175) (28) (175) (44) (7)

Yahoo TIPLA amendment payment — — — (3,487) (561) (3,487) — —

Income (loss) from operations (873) 1,322 5,015 10,751 1,730 6,299 19,469 3,132 Interest and investment income (loss), net 384 549 258 39 6 (25) 1,080 174

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Page 11 9B14N035

EXHIBIT 4 (CONTINUED) Interest expense Other income, net Income (loss) before income tax and

share of results of equity investees Income tax expenses Share of results of equity investees

Year ended 2010(1) 2011(1) RMB RMB

— (4) 200 68 (289) 1,935 (181) (327) (33) —

March 31 Nine months ended December 31 2012 2013 2012 2013 RMB RMB US$ RMB RMB US$ (in millions, except per share data)

(68) (1,572) (253) (1,113) (1,842) (296) 327 894 144 593 1,178 189 5,532 10,112 1,627 5,754 19,885 3,199 (842) (1,457) (234) (1,362) (1,969) (317) (25) (6) (1) (9) (174) (28) Net income (loss) Net income (loss) attributable to non-

controlling interests

(503) 1,608 (299) (425)

4,665 8,649 1,392 4,383 17,742 2,854 (437) (117) (19) (108) (29) (5)

Net income (loss) attributable to Alibaba Group Holding Limited

(802) 1,183

4,228 8,532 1,373 4,275 17,713 2,849

Accretion of convertible preference shares — — — (17) (3) (9) (24) (4)

Dividends accrued on convertible preference shares — — — (111) (18) (59) (156) (25)

Net income (loss) attributable to ordinary shareholders (802) 1,183 4,228 8,404 1,352 4,207 17,533 2,820

Earnings (loss) per share attributable to ordinary shareholders:

Basic Diluted Supplemental information: Adjusted EBITDA Adjusted income (loss) from operations

(0.34) 0.49 (0.34) 0.48 1,390 3,009 (511) 2,254

1.71 3.66 0.59 1.80 8.08 1.30 1.67 3.57 0.57 1.76 7.63 1.23 7,274 16,607 2,672 11,698 23,845 3,836

6,269 15,497 2,494 10,820 22,657 3,645 Adjusted net income (loss) Free cash flow

(141) 2,540 2,280 4,881

5,919 13,395 2,156 8,904 20,930 3,367 8,752 19,745 3,177 17,389 29,936 4,816 Source: Alibaba’s IPO Prospectus, http://edgar.sec.gov/Archives/edgar/data/1577552/000119312514184994/d709111df1.htm, accessed April 16, 2014.

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Page 12 9B14N035

EXHIBIT 5: COMPONENTS OF ALIBABA’S REVENUE (2014) Year ended March 31, Nine months ended December 31, 2012 2013 2012 2013 RMB % of revenue RMB US$

% of revenue RMB

% of revenue RMB US$

% of revenue

(in millions, except percentages) China commerce

Retail 13,422 67.0% 26,970 4,33

9 78.1% 20,216 78.2% 33,461 5,383 82.7%

Wholesale 2,215 11.1% 2,197 353 6.4% 1,709 6.6% 1,706 274 4.2%

Total China commerce 15,637 78.1% 29,167

4,69 2 84.5% 21,925 84.8% 35,167 5,657 86.9%

International commerce Retail 223 1.1% 392 63 1.1% 264 1.0% 653 105 1.6% Wholesale 3,542 17.7% 3,768 606 10.9% 2,853 11.1% 2,904 467 7.2%

Total International commerce 3,765 18.8% 4,160 669 12.0% 3,117 12.1% 3,557 572 8.8%

Cloud computing and Internet infrastructure 515 2.6% 650 105 1.9% 484 1.9% 560 90 1.4%

Others 108 0.5% 540 87 1.6% 317 1.2% 1,189 192 2.9%

Total 20,025 100.0% 34,517 5,55

3 100.0% 25,843 100.0% 40,473 6,511 100.0%

Source: Alibaba’s IPO Prospectus, http://edgar.sec.gov/Archives/edgar/data/1577552/000119312514184994/d709111df1.htm, accessed April 16, 2014.

EXHIBIT 6: ALIBABA’S BALANCE SHEET (2014) Consolidated balance sheet data:

As of March 31, As of

December 31, 2010 2011 2012 2013 2013 RMB RMB RMB RMB US$ RMB US$ (in millions) Cash and cash equivalents and

short-term investments(1) 14,643 15,940 21,744 32,686 5,258 48,962 7,876 Investment securities and

investment in equity investees 2,250 3,933 2,483 2,426 390 15,311 2,463 Property and equipment, net 1,666 1,905 2,463 3,808 612 5,973 961 Goodwill and intangible assets 11,518 11,846 11,791 11,628 1,871 13,250 2,131 Total assets 41,707 37,830 47,210 63,786 10,261 107,058 17,222 Current bank borrowings — 807 1,283 3,350 539 1,200 193 Secured borrowings — — — 2,098 337 8,884 1,429 Redeemable preference shares — — — 5,191 835 — — Non-current bank borrowings — — — 22,462 3,613 30,226 4,862 Total liabilities 15,208 9,413 12,797 52,740 8,484 72,805 11,712 Convertible preference shares — — — 10,447 1,680 10,235 1,647 Total equity 26,493 28,402 34,383 513 83 23,892 3,843

Source: Alibaba’s IPO Prospectus, http://edgar.sec.gov/Archives/edgar/data/1577552/000119312514184994/d709111df1.htm, accessed April 16, 2014.

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Page 13 9B14N035

EXHIBIT 7: SELECTED INTERNET IPOS (AS OF DECEMBER 2013)

COMPANY Stock

Ex- change

IPO date IPO

Offer Price

1st day price

(adjusted) current price

Market Cap

($ billion) Forward

P/E P/S P/B

US

Amazon Nasdaq 5/16/1997 20.75 (1.73) 384.24 175.88B 143.91 2.49 19.22

eBay Nasdaq 9/24/1998 47.38 (1.97) 51.55 66.74B 16.42 4.29 2.92

LinkedIn Corp NYSE 05/18/2011 94.25 229.3 27.38 103.29 19.98 10.92

Groupon Inc. Nasdaq 11/03/2011 26.11 10.24 6.84 40.96 2.84 8.57

Zynga Inc. Nasdaq 12/15/2011 9.5 4.11 3.35 N/A 3.35 1.80 Facebook Nasdaq 05/18/2012 38.23 53.32 130.89 47.61 18.52 9.69 Twitter NYSE 11/07/2013 44.29 59 32.14 N/A 56.39 36.86

Asia

Tencent HK 06/16/2004 HK4.15 (HK4.08) HK466.2 HK$856.49 53.72

(trailing) 96.80 101.81

Baidu Nasdaq 08/05/2005 122.54 (12.25) 171.24 59.92 4.27 13.09 10.73

Giant Inter G NYSE 11/01/2007

18.23 (9.15) 11.07 2.65 11.18 7.15 4.95

Shanda Games Nasdaq 09/25/2009

10.75 (8.43) 4.36 1.17 5.25 1.62 30.29

Renren NYSE 05/04/2011 18.01 2.91 3.22 N/A 16.96 2.75 Source: Assembled by the author based on the information provided by Yahoo! Finance.

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Page 14 9B14N035 ENDNOTES 1 A.Sorkin, “The Man Behind Alibaba’s Eventual IPO,” January 13, 2014, www.cnbc.com/id/101334435, accessed January 27, 2014. 2 Material in this section is based on Alibaba Group’s website, accessed December 14, 2013. 3 All figures are in US$ unless otherwise stated. 4 “The World’s Greatest Bazaar, Alibaba, a Trailblazing Chinese Internet Giant, Will Soon Go Public,” The Economist, March 23, 2013. 5 Ibid. 6 D. Dion, “Yahoo’s Alibaba Prepares for IPO as Its Online Sales Are Set To Explode,” seekingalpha.com, November 11, 2013. 7 L. Yi, “‘I Made Cruel Decisions,’ Said Jack Ma of His Illustrious Career,” South China Morning Post, July 13, 2013. 8 A. Jourdan, “Surviving Chairman Ma: Life in the Shadow of China’s Alibaba,” Reuters, November 26, 2013. 9 “The Alibaba Phenomenon, China’s e-commerce Giant Could Generate Enormous Wealth — Provided the Country’s Rulers Leave It Alone,” The Economist, March 23, 2013. 10 L.Yilun Chen, ”Alibaba Quarterly Profit Rises Ahead of Potential IPO,” Bloomberg, January 29, 2014. 11 Jourdan, op. cit. 12 A. Truong, “Google ‘Fighting the Good Fight’ in China,” Wall Street Journal, September 30, 2010. 13 S. Bass, “China’s Facebook Status: Blocked,” ABC News, July 8, 2009. 14 “Alibaba vs Baidu: Can e-Commerce Trump Search?” ZDNET, September 26, 2011. 15 S. Morrison, “Alibaba Buys U.S. e-Commerce Software Firm Vendio,” Wall Street Journal, June 25, 2010. 16 Ibid. 17 http://venturebeat.com/2013/06/07/fanatics-raises-170m-at-3-1b-valuation-to-sell-stuff-to-sports-fans, accessed December 24, 2013. 18 G. Bensinger, ”Alibaba Leads $206 Million Investment in ShopRunner, Chinese e-Commerce Giant Continues U.S. Push Ahead of Planned IPO,” Wall Street Journal, October 10, 2013. 19 Ibid. 20 Ibid. 21 R. Cookson, “Sina Sells Weibo Stake to Alibaba for US$586 Million,” Financial Times, April 29, 2013. 22 Ibid. 23 www.techinasia.com/alibaba-invested-autonavi, accessed December 24, 2013. 24 www.alizila.com/alibaba-buys-kanbox-expand-cloud-computing-services, accessed December 24, 2013. 25 www.alizila.com/alibaba-invests-364-million-haier-boost-china-logistics, accessed January 27, 2014. 26 Ibid, accessed December 24, 2013. 27 K. Anderson, “Alibaba IPO: Latest Acquisition Brings e-Commerce to Department Stores,” Money Morning, April 3, 2014. 28 C. Clover, “Alibaba Buys Majority Stake in ChinaVision,” Financial Times, March 11, 2014. 29 A. Wolfe, “How Is an IPO Like a Marriage? The Billionaire Founder of China’s Alibaba Goes Public,” Wall Street Journal, May 10, 2013. 30 S. Ross, R. Westerfield, B. Jordan, J. Lim and R. Tan, Fundamentals of Corporate Finance, (Chapter 8), Asia Global Edition, 2012. 31 K. Froot and E. Dabora, “How Are Stock Prices Affected by the Location of Trade?” Journal of Financial Economics, 1999. 32 J. Bodurtha, Dong-Soon Kim and C. Lee, “Closed-end Country Funds and U.S. Market Sentiment,” Review of Financial Studies, 1995. 33 The classification is based on Lease, McConnel and Mikkelson, “The Market Value of Control in Publicly Traded Corporations,” Journal of Financial Economics, 1983. 34 This is in contrast to Twitter, which, as an exception, opted to have a single class share structure. 35 A. Seave, “45 Media Companies Where Investors are Flying Second Class,” Forbes, October 21, 2013. 36 A. Smith, P. J. Davies and S. Foley, “Exchanges Divided by Dual-class Shares,” Financial Times, October 3, 2013. 37 T. Nenova, “The Value of Corporate Voting Rights and Control: a Cross-Country Analysis,” Journal of Financial Economics, 2003. 38 This paragraph is based on Charles Li’s blog post on September 24, 2013, www.hkex.com.hk/eng/newsconsul/blog/130925blog.htm, accessed December 13, 2013. 39 R. Chan and E. Yiu, “Alibaba in Stand-off with HKEx Over Hong Kong IPO,” South China Morning Post, August 24, 2013. 40 L. Yilun Chen, “Alibaba versus Hong Kong Exchange Plays Out in Tsai-Li Blogs,” Bloomberg, Sep 27, 2013. 41 Ibid. 42 E. Barreto and D. Thomas, “U.S. to Get Coveted Alibaba IPO After Hong Kong Talks Founder,” Reuters, September 26, 2013. 43 J. Osawa and T. Demos, “Alibaba U.S. Listing Would be New Battle for Exchanges,” Wall Street Journal, September 25, 2013. 44 M. J. de la Merced, “U.S. Exchanges Set to Compete for Alibaba I.P.O.,” New York Times, October 21, 2013. 45 X. Haiguang, “Commitment to Principles Trumps Alibaba IPO,” Global Times, October 17, 2013; C. Riley, ”Alibaba and Hong Kong Resume IPO Flirtation,” CNNMoney, October 25, 2013. 46 E. Curran, “Alibaba Prompts Hong Kong IPO Rethink,” Wall Street Journal, January 9, 2014. 47 www.hkex.com.hk/eng/exchange/corpinfo/profile.htm, accessed December 17, 2013.

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http://dealbook.nytimes.com/author/michael-de-la-merced/
Page 15 9B14N035

48 E. Hrnjic, P. Matos and L. Tu, Focus Media, 2014. 49 G. Chang, “Chinese Companies to Nasdaq: Sayonara, Zai Jian, Bye Bye,” Forbes, October 10, 2013. www.forbes.com/sites/gordonchang/2013/03/10/chinese-companies-to-nasdaq-sayonara-zai-jian-bye-bye/, accessed November 25, 2014. 50 Ibid. 51 Ibid. 52 R. Jagannathan, A. Jirnyi and A. Sherman, “Why Don’t Issuers Choose IPO Auctions? The Complexity of Indirect Mechanisms,” working paper, 2010. 53 Jay Ritter’s web page, http://bear.warrington.ufl.edu/ritter/IPOs2013Underpricing.pdf, accessed April 17, 2014. 54 In Europe, a very small percentage of IPOs is priced outside of the range — approximately 10 per cent of IPOs. See T. Jenkinson, A. D. Morrison and W. J. Wilhelm, Jr., “Why Are European IPOs So Rarely Priced Outside the Indicative Price Range?” Journal of Financial Economics, 2006. 55 Hsiu-Hua Chang, A. Chen, L. Kao and Chin-Shun Wu, “IPO Price Discovery Efficiency under Alternative Regulatory Constraints: Taiwan, Hong Kong and the U.S.,” International Review of Economics & Finance, 2014. 56 M. Abrahamson, T. Jenkinson and H. Jones, “Why Don’t U.S. Issuers Demand European Fees for IPOs?” Journal of Finance, 2011. 57 www.istockanalyst.com/finance/story/6584732/yahoo-inc-yhoo-set-to-reap-biggest-windfall-as-alibaba-nears-ipo, accessed December 13, 2013. 58 A. Oreskovic, “Yahoo’s Alibaba Stake Takes Heat Off Weak Forecast,” Reuters, October 15, 2013. http://finance.yahoo.com/news/yahoos-alibaba-stake-takes-heat-off-weak-forecast-010615293--sector.html, accessed November 25, 2014. 59 http://blogs.wsj.com/digits/2013/10/16/alibaba-isnt-the-amazon-of-china, accessed December 17, 2013. 60 Ibid. 61 J. Dreyfuss, “Why the Alibaba IPO Is More Important Than Twitter’s,” CNBC.com, October 22, 2013, www.cnbc.com/id/101129930#, accessed November 25, 2014. 62 B. Nichols, “What’s the Best Way to Play 2014’s Hottest IPO?” The Motley Fool, January 6, 2014. www.fool.com/investing/general/2014/01/06/whats-the-best-way-to-play-2014s-hottest-ipo.aspx, accessed November 25, 2014. 63 Dreyfuss, op. cit. 64 Chen, Alibaba Quarterly Profit Rises Ahead of Potential IPO, op. cit. 65 Ibid. 66 www.usatoday.com/story/money/markets/2013/12/31/market-year-end-high/4263237/, accessed April 17, 2014. 67 www.hsi.com.hk/HSI-Net/static/revamp/contents/en/dl_centre/other_materials/20131231e.pdf, accessed April 17, 2014. 68 S. Schaefer, “JD.com IPO Shows Allure of Chinese e-Commerce, with Alibaba on Deck,” Forbes, May 22, 2014. www.forbes.com/sites/steveschaefer/2014/05/22/jd-com-jumps-in-ipo-debut-chinese-e-retailer-rallies-16/, accessed November 25, 2014. 69 F. Hu and J. Browning, “WH Group Pulls $1.9 Billion IPO as Bottom Price Said Snubbed,” Bloomberg, April 30, 2014. www.bloomberg.com/news/2014-04-29/wh-group-said-to-cancel-1-9-billion-hong-kong-initial-offer-1-.html, accessed November 25, 2014.

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http://www.sciencedirect.com/science/article/pii/S1059056013000361
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http://www.sciencedirect.com/science/article/pii/S1059056013000361
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