Insider holdings overhanging Alibaba shares
SAN FRANCISCO — Alibaba may have taken better care of its big IPO investors than Facebook did, but retail investors are already being hurt by the same market force that hampered Facebook shares in their early months of public trading.
In Wall Street-speak, it's called an overhang.
Company insiders and early investors still own nearly all of Alibaba's stock — 85.2%, according to the company's proxy filed this week — and that supply will overhang the market until restrictions on selling it expire.
Alibaba's four largest shareholders — namely SoftBank, Yahoo, Alibaba Chairman Jack Ma and Vice Chairman Joe Tsai — have agreed to 12-month lock-ups on their holdings, which now total 58% of the company's outstanding shares.
Yet a group of insiders and other executives that hold another 105 million shares, or 4.3% of the total, can begin selling in six months.
That group includes members of Alibaba's controlling partnership, as well as employees of Alipay (spun off from Alibaba several years ago) and other holders of stock.
What's more, certain institutional shareholders who own a whopping 315.8 million shares, or about 12% of Alibaba's equity, also have lock-ups that expire in six months.
In all, insiders who hold more than 1.8 billion shares of China's No. 1 Internet retailer will be free to start selling one year from the company's IPO.
That's a significant overhang that's helping depress bids for Alibaba shares.
While Alibaba's investment bankers were more conservative in pricing the IPO than Facebook's were, they did enlarge the offering at the last moment by roughly 13%, making it the largest IPO of all time.
And 5% of the company's shares that were owned by insiders at the time of the IPO were and still are free to sell at any time — an unusually generous provision.
Also, Alibaba's 38% "pop" on its opening day valued the company at 32 times expected cash flow for fiscal 2015 (which ends next June), while Internet rivals Amazon.com and Facebook trade for 23 times.
All this may help explain why the stock has fallen 8% in its first two days in the market, even though the company's prospects look solid.
So even though the company left money on the table to ensure a happier base of institutional shareholders, for retail investors, the Alibaba offering so far looks a lot like most other tech IPOs.
Shinal has covered tech and financial markets for more than 15 years at Bloomberg, BusinessWeek,The San Francisco Chronicle, Dow Jones MarketWatch, Wall Street Journal Digital Network and others. Follow him on Twitter: @johnshinal.
