In the late 1990s, a 34-year-old Chinese schoolteacher named Jack Ma, working from his cramped apartment, unveiled a small, colorful, chaotic Web service he named after an old folk tale.
Fifteen years later, that company, Alibaba, has become the world’s largest online retailer — and the biggest company you may have never heard of. Its marketplaces were home to $248 billion in sales last year, more than Amazon.com and eBay combined.
Led by Ma, now China’s richest billionaire, Alibaba will take its biggest step yet toward global retail domination this week when it begins selling shares to the public for the first time in what’s called an initial public offering, or IPO. The company is predicted to raise more than $24 billion, the biggest stock-market debut in history.
But you can be forgiven if you’ve never heard of Alibaba. Though a household name in China, one of the world’s largest e-commerce markets, Alibaba has remained a relative unknown in the United States. Here are 10 quick things to know about how Alibaba took over the Web.
1. So: Alibaba?
Alibaba Group Holding Ltd. is a massive, elaborate, wildly profitable company that dominates online buying and selling in China: Eighty percent of the stuff sold online there goes through an Alibaba site. Like eBay and other online marketplaces, Alibaba doesn’t own the stuff that it sells on its Web site: It takes a cut from sellers who use it and charges a little extra to advertise. Outside of its main markets, the company has tentacles in a lot of different business lines, including payment services and cloud computing.
It started in 1999 as a way to connect Chinese factories and suppliers with global retailers, and in the years since it has rode skyward atop China’s rapidly expanding middle class. Their increased spending and Internet use have created one of the world’s biggest Web-business goldmines, and investors are hungry to jump on IPOs, like Alibaba’s, that have run so parallel to China’s rise. When Alibaba was founded, 9 million people in China used the Internet. Last year, that number had climbed past 600 million, or nearly twice the U.S. population.
Though Alibaba’s main marketplaces look a lot like America’s online auction houses, the group has developed a quintessentially Chinese sensibility, said Gil Luria, a managing director covering financial technology stocks at Wedbush Securities. They look less like storefronts — with their fixed prices and stable supplies — than thriving, bustling bazaars.
“The reason [Alibaba’s top marketplace] Taobao won China is they were particularly able to customize the experience to the Chinese consumer: the look and feel, the friendliness, the attitude of the Web site, the ability to chat between buyer and seller for negotiation,” Luria said. “Those are things that are distinct between the Chinese marketplace and the American marketplace.”
2. Wait, what’s an IPO?
An IPO allows a private company to “go public,” by selling shares to public investors on the stock market. IPOs provide companies and shareholders two huge benefits: They give investors a way to grab a potentially lucrative piece of a fast-growing start-up, and they let the business raise, in this case, a staggering amount of money while also boosting their global reputation.
IPOs are highly watched because the companies’ values are largely set by how willing investors are to pay for their shares. You may remember the hubbub over Facebook’s IPO, in 2012, when it made its $16 billion market debut.
Alibaba, which plans to sell each of its 320 million shares for between $66 and $68, is expected to set its initial stock price Thursday and start trading Friday on the New York Stock Exchange under the ticker symbol BABA.
The high price is a show of confidence in Alibaba’s future growth, and investors seem more than willing to pay up. During Alibaba’s international “roadshows” — the name companies give to their traveling IPO pep rallies — lines of eager investors have stretched out the door.
At the midpoint of its share price, Alibaba would be valued at about $165 billion, larger than Amazon.com. (Note: Amazon.com’s founder and chief executive, Jeff Bezos, owns The Washington Post.) But Alibaba’s huge starting price does have one drawback: It would need to keep growing like crazy to deliver even moderate returns.
One example: Amazon, which went public at a $438 million valuation, is now valued at around $160 billion, meaning early investors have made about 365 times what they first spent. For Alibaba investors to see similar returns, its valuation would need to grow into the trillions.
3. How big is Alibaba?
Very big. According to company filings with the Securities and Exchange Commission, Chinese buyers made about 11 billion orders on Alibaba marketplaces last year, trading $248 billion in goods and services.
As a low-cost portal for other people’s merchandise, it’s hyper-profitable, with its $7.95 billion in revenue last year netting Alibaba a 45 percent profit margin. (Over the same time, eBay’s was about 18 percent.) At the same time, Alibaba’s satellite companies have seen their own huge success. Its PayPal-like service, Alipay, has been used to move $519 billion in payments, more than double PayPal’s $180 billion.
Alibaba counts about 280 million individual shoppers and small businesses as active buyers, a user base that has doubled in the last two years, SEC filings show. And those buyers are becoming more and more reliant on Alibaba’s offerings: The average active buyer made 49 orders last year, up from 33 in 2011.
4. I’m in the United States. Why should I care?
Alibaba’s native access to China’s low-cost producers could bring some major competition to American storefronts, potentially tamping down prices or helping change where buyers shop, analysts said. Alibaba also wants to appeal to Americans directly through a U.S.-aimed marketplace, 11 Main, now open by invitation only.
Many small American businesses already use Alibaba to solicit bids from low-cost manufacturers and suppliers. Its stated mission is “to make it easy to do business anywhere,” and Alibaba’s huge IPO bump in funding and reputation could lead even more businesses to seek it out.
Analysts said Alibaba seems most interested in growing its base in China. But the group does not seem content to just stay the world’s largest online retailer. It’s investing in mobile browsers, film production and social media, and the IPO will give it billions more dollars to extend its reach — in China and, possibly, the United States.
“In the past decade, we measured ourselves by how much we changed China,” Ma wrote in a letter to potential investors. “In the future, we will be judged by how much progress we bring to the world.”
5. Where’s Jack Ma now?
The former school teacher who founded Alibaba in his apartment is, at age 50, now China’s richest person, with a net worth of $21.9 billion. He’ll remain the face of Alibaba after the company’s IPO. Alibaba’s corporate structure gives Ma and his top partners a strong lock on the company’s control.
Much has been written about the charismatic founder once called “Crazy Jack,” so we’ll just include this one example. To celebrate Alibaba’s 10th anniversary, Ma dressed in leather, black lipstick, a nose ring and a towering mohawk to sing Elton John’s “Can You Feel the Love Tonight” to a Chinese stadium filled with 16,000 employees. (He sings a lot.)
6. What’s with the name?
Ma said the name comes from “Ali Baba and the Forty Thieves,” the Arabic folk tale best known for a magical phrase, “Open sesame,” used to unlock a door to hidden treasures. As Ma told an interviewer, Alibaba “opens sesame for small- to medium-sized companies.” It’s also easy to spell. (In China, the company is called 阿里巴巴, pronounced A li ba ba.) The name of Alibaba’s top marketplace, Taobao, means in Chinese, “to find treasure.”
7. Why is a Chinese company having an initial public offering in the United States?
Lots of Chinese companies choose to go public by listing their stock in Hong Kong, China’s massive financial hub. But the region rebuffed Alibaba’s listing because of the company’s unusual leadership structure, in which a small crew of company insiders controls the board of directors, and its direction, more than ordinary shareholders ever could.
America’s big stock exchanges don’t bristle at those kinds of systems — Facebook, Google and other U.S. companies also use “dual-class” share structures — so Alibaba brought its listing to New York. That was huge news for the exchange, which collects fees from listed companies and will likely see a boost in trading revenues.
8. What else does Alibaba do?
Let’s break it down. It runs Taobao, China’s largest online bazaar, and Tmall, a more polished marketplace catering to bigger brands. Then there are wholesale marketplaces, such as Alibaba.com, which caters to international customers, and 1688.com, which caters to Chinese small businesses.
Besides that, there’s Aliyun, for cloud and Web services, and Alipay, a PayPal-like service controlled by Ma and other Alibaba executives that can, among other things, hold buyers’ payment to manufacturers in escrow until they say they’re satisfied with their goods. The group also has sizable stakes in Sina Weibo (think Twitter) and Youku Tudou (think YouTube).
If that sounds like a lot, it is. But that diversity has won a considerable amount of applause from some investors. As Ma told investors in Hong Kong, according to the Wall Street Journal, he wants Alibaba to be a “zoo that houses many animals rather than a farm which just has one animal.”
9. Why does it matter that Alibaba is based in China?
China is a force to be reckoned with in online retail, even though its population is much less wired than that of the United States. Only 46 percent of China’s consumers have access to the Internet, compared with 82 percent in the United States, according to the McKinsey Global Institute:
Its origins in China have brought a few cultural quirks. Alibaba’s biggest shopping day last year was Nov. 11, Singles Day, a satirical Chinese holiday celebrating the unmarried. Taobao and Tmall logged nearly $6 billion in sales in one day.
It also brings a big wildcard. The Chinese government wields powerful influence over the country’s economic growth by spending money, imposing regulations and, as Alibaba said in a securities filing, “providing preferential treatment to particular industries or companies.” In other words, how Alibaba succeeds or fails could depend largely on China’s power elite, and that’s not very encouraging news for surprise-averse investors.
At Alibaba’s presentation Monday in Hong Kong, Ma reportedly told investors to “think about us just like any other Internet company that happens to be in China.” But the company has not been subtle about its particularly close ties with Chinese government leaders. Ma told a New York crowd that maintaining relationships with Chinese state officials was a top priority.
“Because of their close relationships there, it puts Alibaba Group in a very favorable position in partnering with the government in high-potential, high-growth, high-regulation industries” like investing and online banking, said Henry Guo, a senior research analyst for JG Capital. “If the government wants to partner with a company who’s doing something big and new, Alibaba is a no. 1 partner in that.”
10. Sounds interesting. Should I invest?
It’s probably too late to jump on the first shares: U.S.-based investors needed to have their orders in by Tuesday afternoon, and Alibaba will close its books to new orders in Asia and Europe on Wednesday. Then it plans to set a final price for shares Thursday, with trading to begin Friday. Once the company is public, it’s off to the races, and anyone can buy a share.
As to whether you should, that’s, of course, up to you. A lot of American investors have gotten excited over what seems like the clearest way to bet on China’s growth. But some have questioned the company’s convoluted maze of business interests and unorthodox leadership. Alibaba itself has said its future in China, due to the state government’s whims and regulations, could prove hard to predict. And with rapid changes in Web retail and mobile payments, Alibaba’s success is far from guaranteed. (For a hint of the danger, look to Alibaba’s own SEC filings, where their stated “risk factors” total nearly 27,000 words.)
Alibaba’s listing in New York, and its mammoth size, could give the company a better chance at success. But Chinese companies haven’t typically blown the markets away. Chinese companies listed on American stock markets have seen their shares drop 1 percent every year on average for the next three years, far below the 7 percent average yearly gain for other U.S. IPOs, according to research by University of Florida finance professor Jay Ritter.
In a letter to employees shortly before Alibaba filed for its IPO in May, Ma acknowledged the hazards of going public with such a monstrous listing. But in a tone reminiscent of his schoolhouse past, he also remained chipper about Alibaba’s months ahead.
“Lying behind the massive allure of the capital market, there is unparalleled ruthlessness and pressure,” he wrote. “The past 15 years have been difficult and exciting. Every single day of the future is bound to be extraordinary and complicated. If we don’t put in the effort today, we might not see the sunshine the day after tomorrow.