19 July 2019

Is losing Alibaba to the US really such a loss for Hong Kong?

The decision was made and Hong Kong was the loser — at least some saw it that way when Alibaba Group Holding Ltd. said it was opting to list in the United States rather than closer to home. But, the Hong Kong Economic Journal’s EJ Tactics column argues that a deeper look at the company’s treatment of its minority shareholders suggests that the U.S.’ gain may not be such a Hong Kong loss.

Alibaba has been this way before. Group subsidiary came to Hong Kong for a initial public offering in 2007, riding a market buoyed by a purported “through-train” policy that would allow mainland individuals to invest in the city’s stocks. The mainland stock markets were also peaking and the U.S. subprime mortgage crisis had yet to explode.

The business-to-business e-commerce platform debuted in November that year at an offering price of HK$13.50 (US$1.74) apiece, locking up much more than the HK$13 billion the company had sought to raise. The share price rose quickly to HK$38.92 but later fell back to languish at HK$3.60.

Meanwhile, parent company Alibaba Group cashed in HK$10 billion from the IPO by selling existing shares, leaving only HK$3 billion in the subsidiary’s pocket. The sales of old shares gave a glimpse of the platform’s business prospects, dragging down the share price. The parent company ended up privatizing the subsidiary at exactly HK$13.50 apiece, or a 60 percent premium on the market price.

The privatization deal was a planned move. The parent company bought back the subsidiary’s shares in 16 lots in 2011, with most of the transactions done in September that year when the share price hit its low. The buyback involved a combined 67 million shares at a cost of HK$6.45 to HK$8.95, effectively lowering public holdings for an easier and cheaper privatization. Given the HK$14.3 billion net cash in hand at the subsidiary, the Jack Ma-led parent group spent just HK$4 billion on the deal.

The subsidiary company had stated that the funds raised in the IPO would be used for mergers and acquisitions, but there wasn’t any big move in that direction before the privatization. In contrast to the high profile of the parent group, the subsidiary was surprisingly inactive. The parent group, however, used the pile of cash gained from the IPO to expand the still-private business-to-consumer online retail platform, which then swiftly grew.

That was only two years ago. The group claimed the privatization was a responsible move for the shareholders given the gloomy profit outlook.

One of the reasons attracted a high premium in its listing was the potential for asset injections from the group company, including the business-to-consumer platform. But this potential was never realized and investors, especially those buying high, should have learned a lesson about the management’s wily calculations.

Fast forward to this year and the authorities in Hong Kong reportedly aimed to restrict Jack Ma and other managers from selling a certain amount of their holdings and limit the number of director nominations each partner could have — restrictions Alibaba rejected. It’s hard to say whether the group has chosen the U.S. over Hong Kong, or the Hong Kong authorities have simply given up on the group. Either way, it might turn out to be a blessing to miss out on this mega deal.

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Freelance journalist

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