Sunday, September 21, 2014

Looking at Alibaba 38% Higher

Alibaba's IPO predictably blew the doors off, up 38% after the first day close with market makers doing their best to rein things in from super heating. Aside from the scale, which is inevitable from the passage of time with markets, it was all pretty much according to the Wall Street script.

Of course, things should go swimmingly for a time, otherwise lynch mobs would be seeking the bankers with malice in their hearts.  But, a quick look at Alibaba's press says that the story has legs in the medium term.

The Wall Street Journal curiously takes the position that "this time it's different." Shareholders needn't worry.
"But shareholders can choose whether to live under these limitations (structure, governance, no voting power for the common....). They understand the convoluted workaround was dictated by Chinese law, which restricts foreign ownership. And, let's face it, when investors begin to worry about the actual rights specified in a share agreement, it usually means something has already gone seriously wrong.
True comfort for shareholders comes not from legal boilerplate, but from incentives. Alibaba founder Jack Ma could take the $22 billion raised Friday and stiff his foreign partners. That's a risk. But his self-interest is otherwise. He wants a strong stock as a currency for acquisitions. He wants stock options to motivate his increasingly global management team. He wants easy liquidity for himself and other insiders.
Of course, a lot can go wrong with a company, and Mr. Ma told a road show audience last week that his most important task was government relations back home. That's another risk. But Chinese officials have incentives too."
Common shareholders claims on their company are residual.  They don't have the covenants, protections, clear judicial means to exercise their claims, and even claims on specific assets, as some other investors do.  Something clearly has gone wrong in this structure, for the common equity investors, but they don't care because everybody knows the short term outlook should be a lay up.

I wonder if the Journal remembers the agency problem.  Incentives existed for the managements of AIG, IndyMac Bank, Bank of America, Countrywide Financial, Metris, Green Tree Financial and so on endlessly, and that's just for financial services.   The boards did not represent shareholder interests and rein in their managements.  I would bet that few shareholders of Alibaba could name one of their corporate board apart from Mr. Ma.

"A strong currency for acquisitions."  The management of every public company wants the same thing.  It's no magic elixir.  Remember HP? Remember Compaq and other failed acquisitions before their currency became seriously devalued?

The smart but inevitable move that Mr. Jack Ma made was to cut the Chinese government in on his deal. The selected list of Chinese officials was not created by accident.  It is why Mr. Ma spends so much time on government relations back home.

The payment network may be an undervalued jewel.  The money market mutual fund may revolutionize investing in China.  Unless the Chinese government decides at some point that this capitalism thing needs to have its model adjusted. Years from now?  Probably, but at some point inevitably.

At some point when Mr. Ma is the wealthiest man ever in recorded history, will the siren song of marginally more money still attract him?  What if he decides to invest money, perhaps with the encouragement of the Chinese government, on Chinese tourism to Mars?  What if  his vision and attention wanders to personal causes?

Governance often becomes boilerplate because that makes careers for politicians and their cronies, but it is really about meaningful, properly defined rights and obligations, the right people and the right processes to manage a company in which shareholders get a strong say.

Prediction: 100% of the analyst reports will be Buy or Strong Buy.  There are no new tricks on Wall Street: only the names, dates and scale changes.

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