AT&T
& Facebook. What do both of these companies have in common? They were both
the largest U.S. IPO in history at some point in the last decade. These days, Alibaba
Group Holding Ltd. (NYSE: BABA)
is the poster child for anything and everything IPO related. As of
today, the E-Commerce giant is reported to have delivered a record $21.8
billion in its initial offering. Not exactly your average chump change. Its share
price may even be pivoted upwards of $90 according to BNN. These days, it is
quite easy for investors to get sucked into the “Billion Dollar Charm.” But the
real question is: Will Alibaba be able to sustain itself? Or will it follow the
pattern of the previous IPO giants and slowly decline in the coming years?
The
overriding question for all investors is a matter of sustainability. What good
is a stock if it can only be valuable in the first year? If we look at
AT&T, for instance, we will immediately note something that investors are
immediately unimpressed with. And that is inconsistency in its share price
growth. But of course a record setting IPO is a tough act to follow. It should
not come as a surprise in the slightest when the flame of the corporate candle
starts dimming. In 2000, AT&T premiered with a then record setting IPO. The
shares of the company were at $31.56 and at a $2.06 gain at the close of the
regular trading day. The IPO was priced at $29.50 and raised a staggering
$10.62 billion. Not a bad day for a company that was once a subsidiary of Bell.
Despite less than favorable market conditions, AT&T was able to waiver things
in its favor. For the next couple of months AT&T was on easy street. Its
share price increased steadily following its record setting IPO. Since it went
public on April 26, 2000, its share price increased steadily going from around
$40 to $45.38 in the week of July 10, 2001. But it wasn’t a growth pattern all
too impressive. The months following July were turbulent as the price fell to
$39.31 in August and then steadily spiked to $57.12 in the week of November 6, 2000.
The next year was a downward pattern for share price, as it started at $41.90
exactly one year after the IPO. It ended at $31.40 by the week of April 22, 2002. At
the market open today, AT&T is trading at $35.35 a share. Not exactly the
growth one would expect from a multi-billion dollar IPO.
But
AT&T is certainly not alone in unimpressive post IPO hype. Facebook
followed a similar pattern. Prior to the official valuation of the company, the
target price of the stock increased as was the case with AT&T. Facebook
managed to raise a brilliant $19.65 billion in this process. A number of market
analysts argued that Facebook had been overvalued because of an illiquid
private market. Trades of the stock were at a minimal, making the pricing
unstable. This eventually led to the plummeting of Facebook’s aggregate
valuation post the IPO. If we look at the pattern Facebook followed after its
IPO, we can immediately note that it was a turn for the worse. Its share price began
spiraling downwards immediately following the IPO week. By May 21, 2012, the
price had reached 31.91 and dropped sporadically in the weeks to follow. By
August 27, 2012, the share price was at an embarrassingly low point of $18.06.
Since then, Facebook has made the comebacks of all comebacks. Going from $23.63
in the June of this year to an unbelievable $77.00 as of Sept. 15.
The
overlooked assessment seems to be that Alibaba may face a similar course.
Looking at the two former large IPOs of the last decade, it wouldn’t be
inconceivable to see formidable results 66 post IPO hype. Yet, there are those
who believe that Alibaba will be a different case all together. First off,
everyone should note the exclusion of Alibaba from the S&P 500 index.
Despite trading on the NY Stock Exchange, Alibaba is not an American company. This
inherently means that the funds that track the major US indexes will not be
permitted to purchase the stock, so overall what we are already seeing is the
far less significance of the shares of Alibaba on the broader market. Alibaba
is also hyped in comparison to other tech giants. Most are throwing around words
such as “The Google of China” or “The Amazon of China.” But this really isn’t
an apples to apples comparison. While it is true that Alibaba rakes in some
revenue from its advertising, it is certainly nowhere close to the caliber of
Google. It would be far more feasible to label Baidu the “Chinese Google”
because it is the leading search engine and is a recipient of advertising
revenue in China.
The
bottom line – Investors may be going into this deal with the idea of owning a
piece of the most successful Chinese company. But they would be wrong.
Actually, the Chinese government restricts foreign ownership of certain assets.
The get around is the “Variable Interest Entity” procedure, which ensures a
territory in the Cayman islands to be entitled for the profits that Alibaba
generates in China. This may not be the best option as it is an issue that has
become a question of legality. If you don’t have a certain degree of ownership
in a company, you don’t have a lot of autonomy. This leaves a lot of room for
potential disputes to arise over board members and the so called “Stakeholders.”
Disclaimer: This article was posted with the permission
of a third-party contributor and the opinions contained therein do not
necessarily reflect those of Smallcappower. Smallcappower does not endorse
any investment advice provided by these third-party contributors.
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