Question

If you were a senior executive at Alibaba, would you have made the same decision? Which of the following would you recommend for taking the company's stock public?

a. List on the New York Stock Exchange to avoid China's governance structure rules.

b. Keep the company private and seek additional private investors to raise capital.

c. List on the Hong Kong Stock Exchange to show confidence in the Chinese economy and allow the Chinese consumers who have built up the Alibaba brand to buy stock in the company.

Answer 1

a. I would choose option A and list Alibaba on the NYSE because of three possible motives : control, reputation, and range of motion.

Control

Many believe that Alibaba's U.S. IPO allowed founder Jack Ma to maintain control of the company. Alibaba’s pre-IPO structure allowed Ma and co-founder Joseph Tsai to keep control of the company despite not owning a significant percentage of shares.

 Ma’s reported first choice of exchanges, Hong Kong, frowns on control methods not based on majority ownership.

The NYSE and the U.S. in general, however, allow companies to use share classes to maintain control of publicly traded companies. Even with foreign companies that plan to hold a majority of shares, the share class structure offers an opportunity to raise capital without giving away significant power to the new shareholders.

Reputation

There is an element of prestige in being an NYSE listed company, but there is also a very practical advantage. Companies trading publicly in the U.S. fall under the regulatory supervision of the SEC. Although this often means learning new processes and more paperwork for foreign companies making the leap, it pays off in the long run. The increased scrutiny and transparency SEC oversight provides is seen as a plus by investors, who subsequently have more trust when reading a company's financials and making their investments.

A company like Alibaba can use that trust to position itself even more clearly as Amazon's primary rival. The U.S. listing can make it easier for investors looking for exposure to online marketplaces to choose Alibaba’s growth story over Amazon’s.

Range of Motion

A U.S. listing also allows companies like Alibaba a bit more range of motion when it comes to mergers and acquisitions. Having U.S. dollar shares on a U.S. exchange can simplify any future acquisitions of U.S. businesses and can lessen the scrutiny these deals might face if a foreign listed company made an offer for a U.S. listed business.

The Bottom Line

While there may be many reasons Alibaba chose to list in the U.S., perhaps the most interesting thing about Alibaba’s IPO isn’t that it listed in the U.S., but that it's listed with the NYSE rather than the NASDAQ—a more traditional home for Internet companies. Some suggested that NASDAQ's mishandling of Facebook's IPO two years earlier made Alibaba skittish.

Either way, when foreign companies list on U.S. exchanges, money is generated for the exchanges and investment banks involved, making it a win not just for the foreign company, but for the U.S. as well.