Alibaba IPO Is Going to Kill the IPO Market

Alibaba, the massive Chinese-based ecommerce operator, could be the largest IPO ever. Some analysts believe the company could raise more than $20 billion with the Alibaba IPO. That would dethrone the current No. 1 IPO, Visa (V), which pulled in a haul of $17.8 billion back in 2008.

Despite this massive size, the Alibaba IPO may be bad news — that is, the deal may actually derail new stock offerings for some time — especially for tech transactions.

The reason is pretty straightforward. The fact is that the Alibaba IPO will suck a huge amount of capital out of the financial system that could have been available for other new stock transactions. Just look at what happened with the Facebook (FB) IPO in May 2012:

  • Two months before the Facebook IPO there were only 30 offerings of new stocks
  • After the deal hit the market, the first offering did not launch until about a month and a half later. It also took more than two months until there was another tech deal, which was ServiceNow (NOW).
  • For the rest of the year, there were a mere 12 tech IPOs.

It was awful for the tech IPO market.

And things could be even worse for the upcoming Alibaba IPO. No doubt, tech offerings have suffered a bear run lately. Just look at some of the horrible performances:

alibaba-ipo-recent-ipos

There have also been delays of notable deals, such as the Box IPO. Oh, and even Chinese IPOs have been iffy, as seen with Weibo (WB), the Chinese version of Twitter (TWTR). Since going public in April, the shares are up only 15% — and that’s after the stock was priced at the low end of the range and the number of stock issued was reduced.

Now it’s true that the Alibaba IPO should have no problems getting a deal done. Founded in 1999, the company is a massive operator, with platforms like the Taobao Marketplace (China’s largest online shopping destination), Tmall (China’s largest third-party platform for brands and retailers) and Juhuasuan (China’s most popular group buying marketplace by its monthly active users).  Keep in mind that these businesses — in 2013 — handled $248 billion worth in transaction, which was bigger than Amazon (AMZN) and eBay (EBAY) combined.

Despite all this, there are still some nagging issues. For example, investors may balk at the Alibaba IPO because of of counterfeit and fake goods. Might these expose Alibaba to liability exposure when it becomes publicly traded in the U.S.?

Then there’s Alibaba’s aggressive moves into markets outside the U.S., such as investments in Tango and ShopRunner. Let’s face it, the company will be running up against some tough competition.

At the same time, Alibaba is facing some problems in China. Perhaps the biggest is Tencent (TCHEY), whose WeChat messaging service has grown like a weed. After all, the company is already leveraging the platform for ecommerce. And to do this, Tencent took a major equity stake in JD.com, which is Alibaba’s No. 1 rival (JD.com plans to launch its own IPO next week).

Again, all these issues are not deal killers. The Alibaba IPO will certainly happen — and raise billions of dollars. That much is virtually guaranteed. But the deal will also mean that less capital will be available for many other tech companies, which will likely slow down IPO activity. Besides, if the Alibaba deal does run into some resistance — which is reasonable for any massive deal, especially from one that is based outside the U.S. — it could give investors even more reason to stay on the sidelines.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.


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