The IPO Buzz: Alibaba and the Road to Glory

Alibaba on the Turnpike

So far, the Alibaba IPO has been more traditional.

On May 6, 2014, the company filed for an IPO to raise $1 billion.
On Sept. 5, the company filed an amendment to offer 320.1 million American Depositary Shares at US$60 to US$66 each. The company expects to offer 123.1 million shares and selling shareholders plan to offer 197 million shares. The offering would raise US$20.2 billion, from the mid-point of its price range – making it the largest IPO ever.
The pricing date was set for Thursday, Sept. 18, and the IPO is expected to trade on the New York Stock Exchange on Friday, Sept. 19.

An IPO of this size attracts a lot of talk, the latest being: The “book” accepting indications of interest is said to be closing early; the deal is reportedly well oversubscribed; investors can expect Alibaba to be priced above the high end of its range; various research providers rate the stock as a “buy” and some see an evaluation of US$100 per share for the stock.

Facebook’s Winding Road

The buildup to Facebook’s IPO was one of optimism marked by numerous updated amendments.

On Feb. 1, 2012, Facebook filed for an IPO to raise $5 billion.
On May 3, 2012, the company filed an amendment to offer 337.4 million shares at $28 to $35 each. At that price range, the deal would raise about $10.6 billion. The company was expected to offer 180 million shares and selling shareholders were expected to offer 157.4 million shares.
On May 14, 2012, an amendment was filed, increasing the proposed price range to $34 to $38, up from $28 to $35 per share.
On May 16, 2012, another amendment was filed, increasing the number of shares to 412.2 million, up from 337.4 million shares. The company was expected to offer 180 million shares and selling shareholders to offer 241.2 million shares, up from 157.44 million shares.
On Thursday, May 17, 2012. the deal was priced at 421 million shares at $38 each, on the high end of its latest price rang. It raised $16 billion.
On Friday, May 18, 2012, the deal was set to open on the NASDAQ Stock Market and things went badly wrong. Reportedly glitches developed in the trading system and caused delays in the opening and delays in execution reports getting back to investors and traders. Facebook’s trading became chaotic. The official opening price was $42.05, it sold as high as $45, as low as $38 and closed at $38.23.
Monday, May 21, 2012, turned out to be another nightmare. Facebook opened at $36.53, down $1.70 from the previous close, sold as high as $36.66, as low as $33 and closed at $34.03, down nearly $4 per share from its offering price.

Google’s Road Less Traveled

The Google IPO came to market in what is called a Dutch auction. This method is used by the U.S. Treasury in offering debt securities to raise money. In the IPO market, qualified investors submit the number of shares they wish to buy and at what price. The underwriters or agents collect bids and the clearing price is determined by the highest price it takes to sell all the shares. Under these circumstances, the IPO should trade around its initial offering price. The reason is simple: If all the investors willing to pay more for the IPO in the aftermarket get their orders filled in the Dutch auction, there will be no orders to bid up the stock in the aftermarket.

On April 29, 2004, Google filed for an IPO to raise $2.7 billion.
On July 26, 2004, the company filed an amendment to offer 24.6 million shares at $108 to $135 each. At that price range, the deal would raise about $3 billion. The company was expected to offer 14.1 million shares and selling shareholders to offer 10.5 million shares.
On Aug. 9, 2004, the company filed an amendment to offer 25.7 million shares at $108 to $135 each. At that price range, the deal would raise about $3.1 billion. The company was expected to offer 14.1 million shares and selling shareholders to offer 11.6 million shares.
On Aug. 18, 2004, the company filed an amendment to offer 19.6 million shares at $85 to $95 each. At that price range, the deal would raise about $1.76 billion. The company was expected to offer 14.1 million shares and selling shareholders to offer 5.46 million shares.
On Aug. 19, 2004, the company priced 19.6 million shares at $85 each. The deal raised $1.7 billion.
On Aug. 20, 2004, Google opened at $101.48, sold as high as $109.08, as low as $95.96 and closed its opening day at $100.35, UP $15.35 from its initial offering price.

Google’s clearing price was never reported nor was the size of allocations for the winning bids. The word around the Street was winning bids got about 75 percent of their indications of interest. That left about 25 percent of the orders on the table to be filled in the open market once the IPO started trading.

This leads to deeper research for an explanation. Underwriters left wiggle room to “adjust” the offering price below the clearing price. Here is a clip from Google’s final prospectus: “The initial public offering price will be determined by the underwriters and us (Google) after the auction closes. We intend to use the auction clearing price as the principal factor to determine the initial public offering price and, therefore, to set an initial public offering price that is near or equal to the clearing price. However, we and our underwriters have the ability to set an initial public offering price that is below the clearing price.”

In Europe, the IPO Dutch auction has been used for decades. They call this tactic a “dirty Dutch auction.”

Looking into the week of Sept. 22, 2014, the calendar has five deals with bankers planning to raise about $4.8 billion. But more names could pop onto the calendar by the time that Monday, Sept. 22, rolls around.

Stay tuned.

Disclosure: Neither the author nor anyone else on the IPOScoop.com staff has a position in any stocks mentioned, nor do we trade or invest in IPOs. The author and IPOScoop.com staff do not issue advice, recommendations or opinions.