September 8, 2014

Drew Bernstein, Co-Managing Partner of Marcum Bernstein & Pinchuk, Quoted in Inc. Article “What to Expect From Alibaba’s Big Fat IPO”

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Drew Bernstein, Co-Managing Partner of Marcum Bernstein & Pinchuk, Quoted in Inc. Article “What to Expect From Alibaba’s Big Fat IPO”

Internet behemoth Alibaba is expected to launch the biggest public offering in history, as early as this week. And that will touch off more than a few ripples for U.S. small businesses and investors.

China’s largest e-commerce company, based in Hangzhou, hopes to raise as much as $21 billion from the stock sale, which will value Alibaba at about $160 billion. That will instantly make Alibaba one of the most valuable U.S.-traded tech companies, nearly on par with Facebook and even much older tech companies such as IBM.

The offering, which will give U.S. investors a circumscribed opportunity to own stock in a closed foreign market, is likely to be a boon to U.S. startups, and it could shake up ecommerce as we know it in the U.S. But it also comes with some risks and cautions. Here are some takeaways:

  • This is not Alibaba’s first rodeo. The Chinese e-commerce giant tried to go public in 2008. Alibaba also listed on Hong Kong’s Hang Seng exchange, only to delist after the company lost $20 billion of market value following the financial crisis. (That’s not entirely unheard of, though. Domain registration company Go Daddy, which also announced plans for an IPO recently, cancelled its 2006 IPO, citing unfavorable market conditions.)
  • If things go south, U.S. investors in Alibaba may not have as many rights. U.S. investors purchasing shares of Alibaba will do so through an accounting structure known as a variable interest entity, or VIE. The structure was invented in the 1990s to allow foreign investors to have limited ownership in Chinese companies. Alibaba set up VIE ownership through Alibaba Group Holding Limited, in 1999 in the Cayman Islands. It’s unclear how enforceable the rights of VIEs are in Chinese courts, however. And that’s a source of worry for some. Says Drew Bernstein, managing partner of the China affiliate for accounting firm Marcum Bernstein Pinchuk: “I am not aware of a single instance in the past 15 years where U.S. investors have actually gotten their hands on Chinese assets in an adversarial environment when you have a VIE agreement. The VIE structure is likely to be an added source of scrutiny for U.S. regulators.
  • Alibaba’s IPO could mean the end of U.S. e-commerce dominance. It could usher in a new era of international transactions, which could steal dominance from U.S. e-commerce leaders Amazon and eBay, although not any time soon. “In much the same way that you see Facebook and Google encroaching on each other’s territory… Amazon and Alibaba will encroach on each other’s territory,” says Josh Green, co-founder and chief executive of Panjiva, a global trade information provider. “But we will still see Amazon as the dominant player in the U.S., and Alibaba in China.”