Wall Street has just witnessed the biggest stock market launch in history in the form of the Alibaba IPO. The Chinese internet behemoth (a mixture of Amazon and eBay) raised a record-breaking $25 billion (£15 billion) and saw its share price catapult by more than 38 percent: bankers set the initial price at $68 but by Friday, clamorous investor demand ensured that this zoomed to $92.70. It slipped to just below $90 on Monday, but that was still 35 percent above the initial price.
Alibaba’s overall value has now risen to a surreal $223 billion, well above that for Amazon, eBay and Facebook. Its founder, former English teacher Jack Ma, is reportedly now China’s wealthiest man, with a personal fortune in excess of US$25 billion (£15.3 billion).
But when the sounds of exploding champagne corks and raucous jubilation die down, a more sober look at this event might raise some disquieting questions. First, as The New Yorker journalist John Cassidy notes, Ma and his colleagues haven’t actually created all or even most of the economic value ungirding Alibaba’s colossal market capitalisation. There is no breakthrough technology, no inspirational, newly created products; just clever exploitation of internet technology. Is this IPO and the valuation just a little over-inflated?
Given that the Chinese economy (and Alibaba’s revenue growth) is slowing, the answer just might be “yes.” Academic Atul Shah (Senior Lecturer in Accounting & Finance at University Campus Suffolk) certainly seems to think so. Echoing concerns raised in the Financial Times that the shares were “wildly overpriced”, Shah poured scorn on the media antics of Jack Ma in the run-up to the IPO, globetrotting in what amounted to a worldwide PR stunt to reassure investors that the legal structure of the company was “robust and reliable”. But according to Shah, “the legal structure is frankly complex, and the rights it gives shareholders not precisely clear. Room for doubt then you might say, and yet billions poured into the company.”
In the unseemly race to make a fast buck, Shah detects ominous replays of the recklessness that resulted in the crash of 2008.This IPO was undoubtedly a record-breaker. But it also has the potential to go belly up in the longer run, a less welcome event that could bring a good deal of collateral damage in its wake.