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.”
Other industry executives believe Alibaba is unlikely to be a force in U.S. e-commerce in the near term. For example, Kelland Willis, a Forrester Research analyst and co-author of the recent report “Alibaba: Understanding The World’s Biggest Digital Ecosystem,” thinks it will be at least five years before Alibaba is a real threat to U.S. e-commerce leaders like Amazon or eBay.
She points out that Alibaba leaders have repeatedly said their focus is on China, where they believe there remains lots of room for e-commerce growth. That includes Ma, the one-time English teacher who speaks English both fluently and colorfully. Ma has emphasized that Alibaba prospered in China in large part because the retail industry was underdeveloped, which is not the case in the United States. “In U.S., e-commerce is a dessert. In China, it’s a main course,” Ma has said frequently.
As a company that makes most of its revenue from advertising on its China marketplaces, Willis thinks it likely Alibaba will invest in companies that help it understand U.S. consumers, such as the ride-sharing service Lyft. “How do you make money in advertising? By understanding your customers,” Willis says. “They’re dependent on better understanding U.S. consumers and what they’re doing offline and online.”
Another observer doubtful that Alibaba will make a big short-term play in the U.S. is Ernie Diaz, director of marketing at the Beijing branch of Web Presence in China, which helps Western companies enter the China market. “Jack Ma and company are smart enough to realize that their success comes from having cracked (and largely created) the China online sales code, and that the code does not translate for Western markets, since Amazon is so established and Western online shoppers have so many other smaller, trustworthy online buying options.” He foresees Alibaba investing in helping Chinese shoppers buy from Western brands, “not the other way around.”
Overall, Diaz predicts, “Alibaba will stake about 20% of its resources on adventurous investments, and 80% solidly focused on where the real money is—building out the infrastructure for China’s explosive online retail growth.”
Danielle Bailey, research director at research and consulting firm L2 Think Tank, is also skeptical that Alibaba will have a major impact on e-retail in the U.S. in the near future. She calls the 11Main.com site “underwhelming and undifferentiated,” and adds, “building trust with the American consumer will take time and resources.”
“The largest short-term impact that Alibaba will have in the U.S. is serving as a gateway to the growing Chinese e-commerce marketing and bringing American goods east,” she says. And she says the credibility provided by listing on the New York Stock Exchange will make Western brands more comfortable selling on Tmall.com, Alibaba’s premium online marketplace where such brands as Nike, Apple and Burberry already sell.
However, Bailey adds, “flush with cash post-IPO, an Alibaba acquisition of an Etsy or eBay would be the true game-changer.”
As for Scot Wingo, CEO of ChannelAdvisor Corp., which facilitates retailer sales on online marketplace such as Amazon and eBay, he sees Alibaba most likely focusing in the short term on cross-border trade. He also says it’s possible Alibaba will leverage the logistics expertise it’s gained in China to compete with Amazon on fulfilling online orders for smaller merchants, or even create a new web marketplace.
While Alibaba does not have a strong brand in the U.S., he notes the company has shown it can build successful web marketplaces quickly. For example AliExpress, which allows consumers around the world to buy from Chinese manufacturers and wholesalers, was founded in 2010 and handled $4.5 billion worth of purchases in the 12-month period ended June 30, 2014. “Building a brand isn’t as hard as you would think when you have a great and unique value proposition,” Wingo says.
Peter Cobb, co-founder and executive vice president, of online retailer eBags Inc., No. 163 in the Top 500, doesn’t pretend he knows what Alibaba is going to do. But, he adds, “$8 billion gives Alibaba a ton of options, and they have raised their profile such that many global players would be open to partnering with them. Accessibility to the Chinese consumer market is very difficult without a strong native partner.
“Another wild card is that others might like to see a bit more competition with Amazon.com in the USA, so partnering with Alibaba might add an interesting element.”