Alibaba M&A spree to be questioned at Waldor

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(Sept 8): Hey Alibaba, what’s the deal with all those deals?

That’s a key question fund managers will toss at the Chinese company’s executives today as they seek to drum up demand for a record-breaking initial public offering. The e- commerce giant -- whose IPO could raise as much as $21.1 billion -- has spent $4.6 billion on acquisitions this year in industries ranging from film production to taxi-booking services to professional soccer.

While the company is looking for new ways to lure shoppers to its platforms, and to create avenues of growth, acquisitions could dent Alibaba’s profit margins as it spends to absorb and support the newest businesses. A group of Alibaba insiders having control of the board, meanwhile, gives investors little say over what deals the company will strike.

“For me, the biggest question is the future of the areas where they think they have potential for growth outside of e- commerce,” said Jeff Papp, an analyst at Oberweis Asset Management Inc., which oversees more than $1.5 billion in Lisle, Illinois. “What does that mean to margins to get those new businesses up and running?”

Alibaba’s meetings with investors will start at the Waldorf Astoria hotel in New York, where the company expects more than 500 attendees, according to two people with knowledge of the matter. From there, executives will hit big cities in the U.S. before circling the globe -- stopping in Hong Kong and London -- with a goal of setting a final price for the shares on Sept. 18.

IPO History

Questions won’t be limited to Alibaba’s M&A strategy, of course: Fund managers said they will seek answers on issues ranging from how the company plans to prevent merchants from selling counterfeit objects on its marketplaces to Alibaba’s relationship with its payments affiliate, Alipay.

Fielding these questions will be executives including Chief Financial Officer Maggie Wu and Vice Chairman Joseph Tsai, who leads the team in charge of dealmaking, the people said, asking not to be identified discussing private information.

The IPO could make history, raising as much as $24.3 billion if it’s priced at the top of the current range and an over-allotment option is exercised. That would surpass the global record held by Agricultural Bank of China Ltd.

Tencent Rivalry

Even though Alibaba’s asking investors to value it at as high as $162.7 billion -- above 95 percent of the Standard & Poor’s 500 Index -- the price could rise further as growth- seeking investors are lured in, according to Eric Jackson, founder of hedge-fund Ironfire Capital LLC.

“This is their initial discussion of pricing,” Jackson said. “Then, as the roadshow goes on and bankers build the books, they’ll have an idea about the interest level.”

Bob Christie, a spokesman for Alibaba Group Holding Ltd., as the company is formally known, declined to comment.

Alibaba, China’s most acquisitive company this year with an average of two deals a month, has been in a race with Asia’s biggest Internet company Tencent Holdings Ltd. to extend its online reach.

Tencent, with 15 deals worth a combined $3.7 billion this year -- including stakes in Alibaba rival JD.com Inc. and 58.com Inc., a site similar to Craigslist Inc. -- is just behind Alibaba in spending, data compiled by Bloomberg show.

More Shoppers

Both companies are looking for deals that will capture more users, especially on smartphones. Alibaba said it had 188 million mobile monthly active users in June, compared with 163 million in March. In June, Alibaba agreed to acquire the rest of UCWeb Inc. to add Internet browsers and an application store to its services for mobile devices.

In its prospectus, Alibaba said it will focus its acquisition strategy on gaining users, improving customer experience, and expanding its offerings.

The company, which is selling shares along with some existing shareholders, could raise as much as $8.12 billion that would help refill its coffers after the deal spree.

For now, the explosive growth of China’s online market may help co-founders Jack Ma and Joseph Tsai justify the deals.

Chinese Internet users have grown to 632 million, greater than the population of any other country except India, and could exceed 850 million by 2015, according to government data. McKinsey & Co. predicts online retailing in the world’s second- largest economy will reach $395 billion next year, triple its 2011 level.

Lyft Investment

Net income at Alibaba nearly tripled in the three months through June, to $1.99 billion, helped by gains on stakes held in UCWeb and OneTouch, the company said in a filing last month.

Alibaba’s Silicon Valley-based investment team has also been buying stakes in startups. In March, it led a $280 million investment in messaging app TangoMe Inc., followed the next month by an investment in ride-sharing app Lyft Inc.

“Alibaba can keep up its high growth rate only through acquisitions and diversifying,” said Nelson Yan, the Hong Kong- based chief investment officer of Changjiang Securities Holdings (HK) Ltd. “People have confidence in the company’s power to manage various units after the buying spree.”

Alibaba’s unfettered approach to deals as a private company may not change much as a public one. That’s largely thanks to its corporate governance structure, which enables its 27 partners to nominate a majority of the board.

Shareholders Third

“The partnership structure will be in place to allow them to do things that investors don’t like at the onset,” Papp said. “A big part of it is that you’re buying Jack Ma and his visions, and at points their vision may not line up with how you’d like the decisions to be made.”

Ma made Alibaba’s priorities clear in a letter to investors included in the prospectus, saying it will place “customers first, employees second, and shareholders third.” The company will use its resources to safeguard the sustainable development of the Alibaba ecosystem and won’t make decisions based on short-term revenues or profits, he wrote.

The company’s shareholders will also be able to “derive satisfaction” from knowing they are helping Alibaba create jobs, spur innovation and and drive social transformation, according to Ma.

“We believe that the only way for Alibaba to create long- term value for shareholders is to create sustainable value for customers,” Ma wrote. “We welcome investors with the same long-term mindset.”

Accounting Flaws

Investors in the public company may have to live with the results of Ma’s broadening aspirations. A film producer Alibaba bought in June said last month it uncovered possible accounting flaws after a new management team was installed at the unit.

“Ma and his team will continue to do what they think is right without the U.S.-style checks and balances by investors and their board representatives,” said Joseph Fan, a professor at the Chinese University of Hong Kong.

“This will work when investors believe in the big and growing China market story. But when things go seriously wrong they have little protection,” he said.