Good Example Of Research Paper On Financial Markets And Institutions: IPOs
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IPOs or Initial Public Offerings is a simple process of rights offering which, from the term itself, is done for the first time. Only companies who have the permission of the Securities and Exchange Commission (i.e. SEC, there is a SEC for every country, in the case of the U.S. the U.S. SEC) to do so. Other major requirements include a partnership with an underwriter, and of course, the support of institutional investors .
In IPOs, the institutional investors are the ones who will buy the shares at a certain price set by the investment banking organization or the underwriter. The total number of shares that will be sold shall also be determined by the investment banking organization prior to the day of the IPO. The proceeds of the sales of the shares during the IPO will go to the company’s coffers which it can then use for its capital expense purposes. It can, for example, use the accumulated cash capital to pay for old debts or to expand a core business process or operation in an effort to boost earnings over the next coming years.
The objective of this paper is to discuss the most pertinent details in a recent IPO announced by one of the recently publicized companies in the U.S. Stock Exchange. The subject of this IPO discussion will be Alibaba, a Chinese-owned firm that has recently announced that its IPO date.
Alibaba Group Inc. is a holding company that owns Alibaba, an e-commerce website that provides a wide array of services such as consumer to consumer, consumer to business, business to business, and other sales services via its numerous web sites and portals . Recently, it has also made available in its portfolio of services, an electronic payment feature—giving the users of the e-commerce website the ability to pay for purchases using credit cards, and online currency accounts.
Headed by CEO Jack Ma, the company was founded in 1999 in Hangzhou, China. It started as a website which is Alibaba.com whose primary purpose was to serve as a business to business link between Chinese manufacturers and overseas buyers and or sellers. After making 2012 its most profitable year since it was founded, earning more than 170 billion USD in sales , its CEO, Jack Ma, announced that they were already eyeing for an initial public offering in the United States capital markets and has set Sept 2014 as the target date. Many investors asked why being a Chinese-owned company, the owners still chose to file for an IPO in the U.S. capital markets instead of in nearby ones such as the Hong Kong stock exchange. Initially, the plan was to file for an IPO in Hong Kong but negotiations failed after regulators in Hong Kong failed to give the company the IPO package that they wanted. After being evaluated by the U.S. SEC for eligibility, Alibaba Group was offered an initial 21.8 billion USD IPO package with a price of 60 to 69 USD per share. Because of oversubscription to the IPO, the company was able to work out a deal to increase the IPO package price to 25 billion USD, making it the biggest IPO in the history of the U.S. stock exchange. The IPO date was set on the 18th of September 2014. A total of 368 million shares, which is about 14.9% of the company, were sold the day of the IPO .
The first question that every investor, both institutional and retail, should ask here is how did a company that is considerably smaller to large cap organizations listed in the U.S. stock exchange, managed to get enough support from investment banks and institutional investors for it to be able to raise 25 billion USD on the day of its IPO. Institutional investors are those who amass huge volume of funds so that they can invest it in very promising corporations with a very bright future when it comes to earnings.
The thing about the Alibaba IPO is that it attracted the attention of not just one but a lot of local and international institutional investors licensed to make trades and purchase securities listed in the U.S. stock exchanges. For them to gobble up the millions of shares that Alibaba Corporation’s underwriters initially offered with a total value of 21 billion USD there must be something that these institutional investors know that most retail investors do not. The underwriters who worked on the IPO package of Alibaba Group in the U.S. were Credit Suisse Securities, Deutsche Bank Securities, Goldman Sachs and Company, J.P. Morgan Securities, Morgan Stanley and Company, and Citigroup Global Markets Inc.
So what exactly does these institutional investors know about Alibaba that convinced them to part with their money and place an evidently huge portion of it under the care of Alibaba Corporation? The most possible answer would be the possible earnings that they may obtain either via dividend payouts in the future when the company is already gaining a steady stream of income from its core business operations, or via capital appreciation. First, let us take a lot at the prospect of future earnings.
The first information that investors often seek when it comes to earnings is whether Alibaba would be able to significantly improve its books, particular the earnings part, using the funds that it would receive from the IPO. Based on the fact that the company’s IPO has been oversubscribed by 4 billion USD, and the fact that it attracted a lot of international investors, thanks to its international roadshows , it seems that the investors see a positive future for Alibaba Group’s earnings. Additionally, a few days after the IPO, Alibaba Group’s stock price per share shoot up to almost 50% to more than $90 per share. Basically, the price action shows that a lot of investors are betting on a positive outcome for the company’s capital expenditures and operations .
Knowing the fundamentals of the company is an important part of deciding whether to subscribe to an IPO offer or not. In the case of Alibaba, a lot of institutional investor did not know just what type of business it really is. This is why the company organized an international road show so they can explain the fundamentals of the company, how its executives were very confident that it would make a huge amount of money over the next few years, to the institutional investors. It appears that the international road show was a huge success because they were able to garner enough international investor support to make their IPO the biggest in U.S. history.
Contrary to what most people know Alibaba is not just an e-commerce buy and sell type of website. It is PayPal, Amazon, Amazon Web Services, and eBay rolled into one. It owns Taobao Marketplace (the most popular online shopping site in China); T-Mall (one of China’s most popular retail and platform brands); Alibaba.com (the Alibaba website); 1688.com (another online marketplace that Alibaba Group owns); Alipay (an electronic payment service platform like PayPal); and Aliyun (a cloud service infrastructure that is similar to Amazon’s Amazon Web Services).
One important fundamental aspect to look at would be the company’s earnings because this will determine whether they have been consistently good in the past before the IPO date and whether they have any means to keep their promise to their investors.
The table above shows how in the past three years Alibaba Group’s income grew from a mere $662 M to more than six times to $3.81 B in just a matter of two years, considering that this was a time when they were still filing for the company’s first stock sale or IPO. No one can tell exactly what would have happened had Alibaba decided to file its IPO years earlier but based on the trend of its income, there’s no reason why the company should not earn higher. Nonetheless, the institutional investors that with added capital from the IPO, the company would be able to improve its financial standing, especially earnings-wise, even more.
Analyze the above information and make decision on whether to invest or not to invest in the shares of this company
If I have an access to a significant amount of money, enough to buy even just a small stake of Alibaba Group, I would. This decision is based on the following factors:
Alibaba Group’s strong track record as an industry leader both in terms of earnings and market share in its niche
Strong support from international institutional investors
Relatively undervalued (when future earnings are to be considered) at its IPO price; relatively overvalued over the short term if its current price of above $80 per share is to be considered .
The fact that it is a holding company and that it has the liquidity required to acquire smaller firms, make them profitable, and then improve the company’s earnings in the long run.
Is your decision supported by the developments in the stock price after the IPO
Yes, we included the price action of Alibaba Group’s stock after the IPO in the decision. Based on the short-term price action of the company’s stock, a lot of smaller institutional investors and retail investors want to position in this stock, as evidenced by the fact that its share price shoot up to above $90 a few days after the IPO.
What is your assessment of the future prospects of your investment in this stock?
Some analysts has posted a target price of $115 per share over the next 52 weeks, which would make for an almost 100% appreciation in invested capital for institutional investors who bought at the IPO price of $60 to $69 per share. Based on the short term price action of the company’s stock post-IPO, its fundamentals (i.e. earnings in the past three years and the positive perception of large institutional investors), a target price of $115 would look rather low.
Barreto, E. "Alibaba IPO ranks as world's biggest after additional shares sold." Thomson Reuters (2014).
Bezos, J. "Alibaba's IPO Roadshow." Business Insider (2014).
Heller, J. "Alibaba's IPO: Everything you need to know." Wall Street Journal (2014).
Investopedia. "Basics, IPO." Investopedia (2014).
Mae, R. "Alibaba Claims Title for Largest Global IPO Ever with Extra Share Sales." Forbes (2014).
Market Watch. "Alibaba Group Holding Ltd. ADS." Market Watch (2014).
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