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08-05-2014, 10:39 PM
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At China’s Alibaba, chairman Ma’s dealings raise red flags
At China’s Alibaba, chairman Ma’s dealings raise red flags
Mr Jack Ma, chairman of China's largest e-commerce firm Alibaba Group, gestures during a conference in Hong Kong, on March 20, 2012. Photo: AP
Alibaba’s IP prospectus highlights longstanding questions about the company’s complex corporate structure and conflicts of interest surrounding Ma
PUBLISHED: MAY 8, 3:50 PM(PAGE 1 OF 1) - PAGINATE
SAN FRANCISCO/BEIJING — Part-way through Alibaba’s long-awaited IPO prospectus was a subtle, but striking, warning: Investors should know that lead founder and executive chairman Jack Ma might work against the company’s best interests.
The acknowledgement, on page 42 of a 300-plus-page filing, highlighted longstanding questions about the Chinese e-commerce giant’s complex corporate structure and potential conflicts of interests surrounding Mr Ma, who started Alibaba in his one-room apartment in 1999 and has since branched out into markets as diverse as e-payments and financial investment.
To be sure, such warnings of potential conflicts were included in the prospectuses of many founder-controlled tech companies, including Facebook and LinkedIn. But Alibaba’s warning stands out given Mr Ma’s numerous investments in third-party firms that partner with his company.
One hot-button issue is Mr Ma’s control of Alipay, the PayPal-like affiliate established by Alibaba in 2004, which continues to provide the lions’ share of payment services for the company’s retail marketplaces.
Four years ago, Alibaba spun out Alipay to a group including Mr Ma, who holds a 46 per cent stake in Alipay through another company, Zhejiang Alibaba.
A row ensued: Alibaba investors including Yahoo and SoftBank objected to the spinoff, which Mr Ma argued was needed to comply with Chinese central bank regulations governing foreign ownership of financial firms.
Alibaba, Yahoo and SoftBank settled the matter in 2011, but not before Mr David Einhorn, the Greenlight Capital hedge fund manager, sold all of his Yahoo shares in frustration at what he deemed mutual “finger-pointing” between the companies.
Alibaba reiterated on Tuesday (May 6) its longstanding position that the 2010 spinoff was intended to conform with central bank regulations.
But it also said no such rules were in place. “At the time when the licences were first issued, no such additional regulations governing foreign-owned payment companies had been put in place.”
The company declined to comment beyond the prospectus on the matter of Mr Ma’s potential conflict or his investments. It also declined to comment on media reports that it is in talks to buy back a stake in the payments firm, or whether Mr Ma would recuse himself from any Alipay talks.
UNWANTED ATTENTION
Beyond Alipay, analysts and attorneys say they are concerned about Mr Ma and Alibaba’s related-party transactions and “variable interest entities” — firms associated with Alibaba in which Mr Ma has a holding.
In the prospectus, Alibaba says structures such as “variable interest entities” are to its benefit. The investments give Alibaba flexibility in the face of Chinese regulation. Mr Ma can assume legal ownership of a company and agree to transfer “all economic benefits” to Alibaba when legally permitted, the prospectus said.
According to Tuesday’s prospectus, Mr Ma has a 40 per cent stake in “several entities” with ties to Yunfeng Capital, an investment firm that has operated alongside Alibaba.
“You’ve got this complex web of variable interest entities, limited shareholder voting rights,” said Associate Professor of finance Jim Angel, at Georgetown University. “There’s definitely a lot of questions over this offering, but there’s no doubt that Alibaba is a major e-commerce play.”
The deals can be complex. Last month, Alibaba agreed to loan 6.5 billion yuan (S$1.3 billion) to co-founder Simon Xie. Through another company formed with Mr Ma, Mr Xie would then purchase a minority stake in Wasu Media, an Internet TV firm. Alibaba at the time announced it had reached a cooperation deal with Wasu Digital TV, the listed company’s parent. It did not mention the loans or investment.
Alibaba also holds a stake in a separate TV and film company, and M&A lawyers have said the purchase could have been designed to circumvent anti-competition rules.
“This arrangement certainly raises serious questions about corporate governance,” a Beijing-based attorney at a multinational law firm said when the investment was made. The person declined to be identified because of the sensitivity of the matter.
“Alibaba’s tendency to do these kinds of deals makes the company appear to be cavalier about these kinds of conflicts. Here you have a guy in senior management taking 6 billion yuan out of his company to make an investment in another firm that he controls.”
Mr Ma’s investments do not ring alarm bells for everyone.
“This is one of those risk factors they have to tell you about, but you don’t have to worry about it as long as Jack Ma retains a meaningful stake in Alibaba,” said Ms Lise Buyer, an IPO advisor who guided Google’s 2004 offering.
“This seems to me that something investors should be aware of, but not something they should be particularly nervous about at this stage in the company’s life,” Ms Buyer said. “Call me in a year.”
But Ms Buyer raised another issue — the fact that Alibaba had just four board members. It intends to expand that to nine, but investors should wait to see who gets appointed before its listing, she said. “It would be nice to see that before putting your money down,” she said. REUTERS
At China’s Alibaba, chairman Ma’s dealings raise red flags
At China’s Alibaba, chairman Ma’s dealings raise red flags
Mr Jack Ma, chairman of China's largest e-commerce firm Alibaba Group, gestures during a conference in Hong Kong, on March 20, 2012. Photo: AP
Alibaba’s IP prospectus highlights longstanding questions about the company’s complex corporate structure and conflicts of interest surrounding Ma
PUBLISHED: MAY 8, 3:50 PM(PAGE 1 OF 1) - PAGINATE
SAN FRANCISCO/BEIJING — Part-way through Alibaba’s long-awaited IPO prospectus was a subtle, but striking, warning: Investors should know that lead founder and executive chairman Jack Ma might work against the company’s best interests.
The acknowledgement, on page 42 of a 300-plus-page filing, highlighted longstanding questions about the Chinese e-commerce giant’s complex corporate structure and potential conflicts of interests surrounding Mr Ma, who started Alibaba in his one-room apartment in 1999 and has since branched out into markets as diverse as e-payments and financial investment.
To be sure, such warnings of potential conflicts were included in the prospectuses of many founder-controlled tech companies, including Facebook and LinkedIn. But Alibaba’s warning stands out given Mr Ma’s numerous investments in third-party firms that partner with his company.
One hot-button issue is Mr Ma’s control of Alipay, the PayPal-like affiliate established by Alibaba in 2004, which continues to provide the lions’ share of payment services for the company’s retail marketplaces.
Four years ago, Alibaba spun out Alipay to a group including Mr Ma, who holds a 46 per cent stake in Alipay through another company, Zhejiang Alibaba.
A row ensued: Alibaba investors including Yahoo and SoftBank objected to the spinoff, which Mr Ma argued was needed to comply with Chinese central bank regulations governing foreign ownership of financial firms.
Alibaba, Yahoo and SoftBank settled the matter in 2011, but not before Mr David Einhorn, the Greenlight Capital hedge fund manager, sold all of his Yahoo shares in frustration at what he deemed mutual “finger-pointing” between the companies.
Alibaba reiterated on Tuesday (May 6) its longstanding position that the 2010 spinoff was intended to conform with central bank regulations.
But it also said no such rules were in place. “At the time when the licences were first issued, no such additional regulations governing foreign-owned payment companies had been put in place.”
The company declined to comment beyond the prospectus on the matter of Mr Ma’s potential conflict or his investments. It also declined to comment on media reports that it is in talks to buy back a stake in the payments firm, or whether Mr Ma would recuse himself from any Alipay talks.
UNWANTED ATTENTION
Beyond Alipay, analysts and attorneys say they are concerned about Mr Ma and Alibaba’s related-party transactions and “variable interest entities” — firms associated with Alibaba in which Mr Ma has a holding.
In the prospectus, Alibaba says structures such as “variable interest entities” are to its benefit. The investments give Alibaba flexibility in the face of Chinese regulation. Mr Ma can assume legal ownership of a company and agree to transfer “all economic benefits” to Alibaba when legally permitted, the prospectus said.
According to Tuesday’s prospectus, Mr Ma has a 40 per cent stake in “several entities” with ties to Yunfeng Capital, an investment firm that has operated alongside Alibaba.
“You’ve got this complex web of variable interest entities, limited shareholder voting rights,” said Associate Professor of finance Jim Angel, at Georgetown University. “There’s definitely a lot of questions over this offering, but there’s no doubt that Alibaba is a major e-commerce play.”
The deals can be complex. Last month, Alibaba agreed to loan 6.5 billion yuan (S$1.3 billion) to co-founder Simon Xie. Through another company formed with Mr Ma, Mr Xie would then purchase a minority stake in Wasu Media, an Internet TV firm. Alibaba at the time announced it had reached a cooperation deal with Wasu Digital TV, the listed company’s parent. It did not mention the loans or investment.
Alibaba also holds a stake in a separate TV and film company, and M&A lawyers have said the purchase could have been designed to circumvent anti-competition rules.
“This arrangement certainly raises serious questions about corporate governance,” a Beijing-based attorney at a multinational law firm said when the investment was made. The person declined to be identified because of the sensitivity of the matter.
“Alibaba’s tendency to do these kinds of deals makes the company appear to be cavalier about these kinds of conflicts. Here you have a guy in senior management taking 6 billion yuan out of his company to make an investment in another firm that he controls.”
Mr Ma’s investments do not ring alarm bells for everyone.
“This is one of those risk factors they have to tell you about, but you don’t have to worry about it as long as Jack Ma retains a meaningful stake in Alibaba,” said Ms Lise Buyer, an IPO advisor who guided Google’s 2004 offering.
“This seems to me that something investors should be aware of, but not something they should be particularly nervous about at this stage in the company’s life,” Ms Buyer said. “Call me in a year.”
But Ms Buyer raised another issue — the fact that Alibaba had just four board members. It intends to expand that to nine, but investors should wait to see who gets appointed before its listing, she said. “It would be nice to see that before putting your money down,” she said. REUTERS
