Will Alibaba disrupt U.S. e-commerce?
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The Chinese e-commerce giant will have $8 billion in cash after its IPO as well as valuable stock it can use for acquisitions. The company chairman says it will “vigorously invest” in the United States. But invest in what? Experts offer their opinions.
What will Alibaba do with all that money?
That’s a question being widely discussed in e-commerce circles as Alibaba Group Holding Ltd., the dominant e-commerce company in China, moves toward an initial public offering of stock expected to take place in the next few days.
“After our IPO in the United States we will vigorously expand in Europe and the United States,” Alibaba founder and executive chairman Jack Ma told a Hong Kong TV reporter in a brief interview yesterday as he arrived to pitch his stock to investors. “Meanwhile, we will not give up on Asia.”
The company did make one thing clear in its filings with the U.S. Securities and Exchange Commission: It does not plan to repatriate the IPO proceeds to China. With Alibaba itself planning to sell 123 million shares at an initial price it estimates at between $66 and $68 per share, that figures to give Alibaba more than $8 billion to invest. Plus, as a public company whose shares will trade on the New York Stock Exchange under the symbol BABA, it could use its shares as currency in addition to its cash in making acquisitions. In all, Alibaba says 368 million shares will be sold in the stock offering, most by shareholders, producing an IPO value likely to exceed $24 billion, which would make it the biggest IPO ever.
The company’s haul from the IPO would put the acquisition of many big U.S. e-retail names well within Alibaba’s reach. That would include struggling retail chains like Sears Holding Corp., which has a current stock market value of $3.6 billion and is No. 5 in the 2014 Internet Retailer Top 500, or Best Buy Co. Inc., No. 15, with a market value of $11.6 billion. Alibaba could consider established web-only retailers like Overstock.com Inc. (No. 31, $444.5 million in market value) or Blue Nile Inc. (No. 78, $354.0 million), or innovative e-retailers like zulily Inc. (No. 55, $4.6 billion) or CafePress.com (No. 117, $60 million). Other names that come up are privately held Etsy Inc., an e-retailer that helps craftsmen sell their goods online and is No. 30 in the Top 500, and eBay Inc., which has a business model like Alibaba’s in that it does not own merchandise but only serves as a platform for other online merchants to sell.
Alibaba already has been on an investment spree, spending $6.6 billion since the beginning of 2013 buying or taking stakes in dozens of companies inside and outside of China, including $5.2 billion in 2014 alone, according to Dealogic, which tracks merger and acquisition activity. But the investments have been so varied that it’s hard to see a pattern.
Some have been in U.S. e-commerce. For example, the company has taken a 39% stake in ShopRunner, which enables U.S. retailers to offer shipping deals to shoppers, and has invested in Fanatics Inc., a retailer of sports team apparel that is No. 42 in the Top 500. Alibaba’s previous investments in e-commerce technology providers Auctiva and Vendio formed the basis for the launch in June of Alibaba’s first online marketplace where U.S. merchants can sell to U.S. consumers, 11Main.com.
But the company has made much larger investments in a variety of technology companies, according to a compilation of Alibaba’s deals by Forrester Research Inc. Among its deals in China, Alibaba has invested $4.35 billion in mobile web browser developer UCWeb, $1.05 billion in the Wasu Media group of radio and TV stations, $1.5 billion in AutoNavi, a provider of car navigation systems. It also spent $192 million to buy the Guangzhou Evergrande Football Club. Outside of China, Alibaba invested $250 million in the U.S. car-sharing app Lyft, $215 million in mobile messaging service Tango and $249 million in SingPost, a logistics service that is a subsidiary of Singapore’s postal company, according to Forrester.
Where Alibaba will invest after the IPO is unknown, but there may be a hint in the company’s often-stated declaration that it aims to help small businesses. “Our proposition is simple: we want to help small businesses grow by solving their problems through Internet technology. We fight for the little guy,” Ma said in a letter to potential investors in Alibaba.
Eric Jackson, founder and managing partner of hedge fund IronFire Capital and a close observer of Asian technology companies, said he heard a similar view in January when he interviewed Alibaba vice chairman Joseph Tsai. According to Jackson, Tsai pointed out how merchants that sell on Amazon sites have little opportunity to stand out. “To the end user, Jackson says, “it’s an Amazon experience they’re having, not an individualized experience with that merchant. That’s not the way Alibaba approaches the market. They would prefer those third-party merchants to differentiate themselves more. I think you can expect them to try to help others with that kind of view compete against Amazon.” Amazon.com Inc. is No. 1 in the Top 500.
Jackson points to Etsy as the kind of company Alibaba might invest in because of the way it promotes the artisans that sell on its site. “Anyone going about things differently than Amazon is a natural ally to Alibaba,” Jackson says.
He says Tsai also pointed to how Facebook Inc. grew its social network around the world, including in countries where there already were online networks that connected friends. “They got a lot of core users in each country to start using Facebook, to fall in love with it, then they would naturally get their friends hooked into it,” Jackson says. “The takeaway for Alibaba is: Start from your strengths.” He says that might include Alibaba building its business outside of China first by catering to overseas Chinese who already know Alibaba’s marketplaces in China.
Jackson predicts Alibaba will be a big Internet player in the U.S. in five years, and possibly a significant force in online retailing. But he doesn’t think the Chinese company will try to replicate what Amazon has built. “They’re not thinking, ‘We’ve got to take our IPO money and open 28 distribution centers.’ I don’t think they plan to go about competing that way.”
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