* Tech giant only gave up hope of HK IPO recently -sources
* Negotiations with HK regulators, exchange lasted a year
* HK public consultation delay affected decision -sources
By Denny Thomas and Elzio Barreto
HONG KONG, March 19 After a year of waiting, the
man running what could be the biggest-ever technology IPO
finally lost patience with Hong Kong.
Joe Tsai, the Alibaba Group Holding executive
in charge of plans for the highly anticipated deal, only
abandoned hope of a Hong Kong listing in the last few weeks,
according to people familiar with the matter. The company's
shareholding structure, giving senior managers sway over board
appointments, would not pass muster with local regulators.
The final straw was the snail's pace of a public
consultation process of reviewing local listing rules on which
Alibaba had pinned its hopes, the people said. That delay,
coupled with a rush of Alibaba rivals seeking to tap the frothy
U.S. tech market, forced the company's hand in the end, the
Last Sunday, after nearly a year of talks with Hong Kong
regulators and stock exchange officials, Alibaba said it will
list shares in the United States in a deal expected to exceed
Facebook Inc's $16 billion offering in 2012.
"Alibaba realized this was not a battle that they could have
won within the time frame they were looking to float the
company," said Keith Pogson, managing partner for financial
services at consulting firm EY in Hong Kong. "So they decided to
find a home that was more accommodating with such structures."
Alibaba's choice is a blow to Hong Kong's financial
industry, in terms of lost prestige, fees and trading volumes.
The absence of a large, dynamic tech company will sting the Hong
Kong exchange as it tries to diversify its publicly traded
stocks away from Greater China financial and property companies,
bolstering its status as a global financial centre.
Hong Kong's loss is the U.S. financial industry's gain. The
deal has the potential to bring in about $300 million in
advisory fees alone for the banks involved, based on an
estimated 1.75 percent commission.
The saga pitted a Chinese tech juggernaut and its financial
advisors against securities officials guarding rigid
shareholding rules meant to protect retail investor interests
with a one share-one vote guarantee, in a city where family-run
businesses and tycoons hold heavy influence.
"It's a shame that Hong Kong lost the deal, but we lost the
deal for good reasons," said EY's Pogson. "So we should
congratulate the Hong Kong regulators for sticking to their guns
on values, for showing that Hong Kong is a robust market where
these kind of issues do matter and people care about investor
Alibaba had held out hope that a review of Hong Kong's
shareholding rules would keep the door open for a listing in the
city, the people familiar said.
But the public consultation moved slowly, with Hong Kong's
Securities and Futures Commission (SFC) pushing back against the
stock exchange's original draft proposals for a raft of rule
changes. The SFC was adamant that the proposed changes to the
city's listing rules should not be influenced by Alibaba's hopes
for a Hong Kong listing, the people familiar said.
Alibaba declined to comment on why it decided to list in the
The original plan to list late in 2013 had already gone by
the wayside last year in part because of SFC opposition to
Alibaba's unique corporate structure. Under Alibaba's statutes,
the company's partners are able to nominate and control the
board - a challenge to the one share-one vote standard applied
in Hong Kong.
While Alibaba waited for Hong Kong regulators to make a
decision, Tsai and company co-founder Jack Ma could see that not
only were the stocks of U.S. tech giants like Facebook and
Google Inc surging, but that smaller Chinese Internet
companies such as JD.com and Weibo were forging ahead with their
own U.S. listing plans.
The technology-heavy Nasdaq Composite index has
jumped 34 percent over the past year, and has featured IPO
candidates in the last year that have stoked views that the
index is reaching bubble levels.
As the stalemate with Hong Kong regulators dragged on, there
was concern within Alibaba's camp that the market's appetite for
what could be one of the largest IPOs ever would wane the deeper
into 2014 the deal moved, people familiar with the matter say.
Alibaba has yet to say which U.S. exchange it hopes to use,
or confirm a timetable for the sale. A listing on either the New
York Stock Exchange or the Nasdaq could come as soon as the end
of July, people familiar with the matter say.
A listing in New York would mean scrutiny from U.S.
regulators and class action lawyers. Yet it would also mean
access to bigger pools of money from investors with deep
knowledge of the technology sector, possibly boosting Alibaba's
Alibaba's largest shareholders are Internet services company
Yahoo Inc with 24 percent and Japanese telecoms and
media company Softbank Corp with 37 percent. Based on
the average of 12 analysts, Alibaba is estimated to have a
market value of $141 billion.
Based on that valuation, and Yahoo selling half its stake,
as previously agreed, the IPO could raise more than $17 billion.
The stance by Hong Kong's SFC against Alibaba's partnership
structure surfaced last year, through a series of private
meetings. People familiar with the matter said that Alibaba
representatives met the SFC several times throughout the year,
but no progress toward a compromise ever materialised.
One way around that impasse was a proposal by the Hong Kong
stock exchange to alter the city's shareholding rules to make
them more flexible.
If the stock exchange, together with input from the market,
could draft new shareholder rules with the SFC's approval, a
window for an Alibaba IPO would remain open. Given the months
that such public consultation processes take, Alibaba still
could have secured a deal by the end of 2014, people familiar
with the matter say.
Instead, Alibaba got stuck in the middle of a turf war
between the stock exchange and the SFC, a person familiar with
the matter said.
The stock exchange operator, known officially as Hong Kong
Exchanges and Clearing Ltd, or HKEx, drafted a
consultation paper on the rule changes and sent it to the SFC
earlier this year, hoping to kickstart the process. But the SFC
sent the draft paper back to the HKEx last month, proposing a
series of changes.
"The SFC didn't want the HKEx to rush through the
consultation paper. It was pushing back and telling the
exchange, 'You guys are not the decision-makers,'" said the
person, who was not authorized to speak to the media.
The SFC declined to comment. The HKEx said a discussion
paper on weighted voting rights and other topics would not be
published this quarter.
One person familiar with the matter said that before making
the official decision to move the listing to the U.S., Alibaba
would have contacted Chinese authorities to let them know of
their choice. Beijing officials preferred to have the company
listed and regulated in Hong Kong, rather than overseas.
Sunday's statement announcing plans for an IPO in the U.S.
was the first time the company had ever officially acknowledged
its stock offering, and the first time it pinpointed the
People familiar with the matter say that Alibaba did not
plan to issue the release, but that rumors and media reports
were swirling. Management decided to finally put speculation to
The announcement came only after Alibaba's senior vice
president and head of corporate finance, Michael Yao, a former
Rothschild banker, led phone calls to the investment banks
courting the company for months, informing them they would play
a role in the deal, people familiar with the matter said.
Citigroup, Credit Suisse Deutsche Bank
, Goldman Sachs, J.P. Morgan and Morgan
Stanley are working with Alibaba on the IPO, with the
first formal meeting of bankers, lawyers and accountants to map
out the IPO process scheduled for Mar. 25, people familiar with
the matter said.
(Reporting by Denny Thomas and Elzio Barreto; Additional
reporting by Paul Carsten in BEIJING and Olivia Oran in NEW
YORK; Editing by Michael Flaherty and Kenneth Maxwell)