There have been two pretty big promo campaigns about the Alibaba IPO in the last week or so — one from Bill Patalon in an ad for his Private Briefing, and the other from Mike Palmer for Jeff Clark’s S&A Short Report… so I thought we should try to take a look, answer some reader questions, and see if these two folks are touting the same “backdoor” play on Alibaba.
Alibaba, if you haven’t yet heard the buzz and hype, is a huge e-commerce company based in China — they offer a variety of different transactions in their marketplace(s), including business to business ordering (like for companies seeking Chinese suppliers) as well as direct-to-consumer sales (Taobao and others) much like those handled most often by Amazon or eBay in the US, with similarly huge market share to those two but in a faster-growing market, and they have a large payment network (AliPay) that is essentially their homegrown version of eBay’s PayPal.
They’re huge, and as one of the largest tech companies that is not public there has been a surge of interest in their IPO — something that’s been on many investors’ radar screens for several years but has really hit public attention now that they’ve actually filed their first registration for the public offering (that was a couple weeks ago) and a listing in New York (I think the Nasdaq and the NYSE are still fighting for that listing, don’t know where it will end up).
The likely date for their IPO seems to be sometime in August, though these things aren’t that predictable far in advance (it could easily be sooner, any later would be perceived as a delay), and it will almost certainly be a massive and heavily covered event — much like the facebook IPO two years ago or the Google IPO ten years ago. And Alibaba Group has some other similarities with those two — it will have a complicated ownership structure that keeps the current managers in control even without majority ownership, and added to that it’s got the complication of being a tiered ownership structure that’s designed to get around Chinese ownership restrictions (more on that from the NY Times here).
So these aren’t likely the last teasers we’ll see that focus on Alibaba, which will probably emerge as a $100+ billion company after the public offering (there are estimates that put it above $250 billion). And small investors obviously can’t buy directly into Alibaba shares before the IPO, even if we wanted to, so what is this “backdoor” that the folks from Money Morning and from Stansberry are touting?
The Stansberry pitch for the S&A Short Report opens like this:
“How to get in on the biggest IPO in American History… before it goes public.
“Normally, Initial Public Offerings (IPOs) are completely useless for ordinary, retail investors. But our expert trader has found a rare opportunity that allows you to jump in front of investment bankers and hedge fund managers to potentially make a small fortune on what is being dubbed, ‘The largest IPO in U.S. history.'”
And the Private Briefing spiel starts similarly:
“Chinese Internet giant Alibaba recently filed papers for what will surely be the biggest IPO in history… virtually guaranteeing ‘millionaire status’ to a swath of insiders, high-net-worth investors, and bankers.
“But on this particular deal, a lot of regular folks will get rich, too.
“That’s why I want to send you this urgent report.
“You see, under normal circumstances, mega-IPO profits are reserved for the ultra-rich.
“But the Alibaba IPO – a potential $20 billion deal – comes with a little-known ‘exception.’
“And for you, it could be a hugely profitable one.
“My newest research has led me to a backdoor way for you to make a fortune on the Alibaba deal RIGHT NOW… long before the shares go public.”
And what is it that they’re touting?
“… there’s an American company that was smart enough to build up a huge position in Alibaba over the years.
“And now that the Chinese firm has decided to go public, this savvy American firm is about to cash out. Big time.
“It could reap a $12 billion windfall on the deal. A payout that would more than double this company’s cash flow… in a day.
“I’m talking about an estimated 153% pop in the quick action – with the potential to rise as high as 400% if you’re patient and willing to ride the upside. It’s up to you.Are you getting our free Daily Update
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“I’m anticipating the initial gains to come fast – springing directly from the massive ‘Alibaba Shockwave Effect’ that’s already spreading through global markets – and will most likely end minutes after the IPO goes live several weeks from now.”
Well, that’s quite clearly a reference to Yahoo (YHOO), which owns 24% of Alibaba Group (and has otherwise been such a mess that it has often been valued based mostly on the anticipated return on their Alibaba shares).
But are they really touting Yahoo shares as some “secret backdoor” into Alibaba shares? That’s a little hard to swallow, given the overwhelming, breathless coverage the Alibaba IPO has received and the impact that estimates of Alibaba valuation already have on YHOO shares every day. But I suppose folks who don’t generally read the business press or watch CNBC might not know that YHOO isn’t really Yahoo these days.
Here’s how they put it:
“Take the backdoor company’s share price (which is currently very cheap) and add in the ‘Alibaba Effect’… those shockwaves I was telling you about being created by the IPO offering.
“Well, the calculation can only come up one way.
“And that’s with the backdoor play’s stock price rising substantially.”
The spiel goes on to say that the unnamed secret company (clearly YHOO) could do a few things with their windfall — they’re selling part of their stake in the IPO so they can either dividend it out, buy back stock or make acquisitions, and the remaining shares they hold they could sell in the future or simply hold onto if Alibaba turns out to be as spectacular a grower as some predict.
Unmentioned, of course, is the fact that Yahoo will owe taxes on their Alibaba gains when they sell… or that they could always indulge themselves in the other popular tech company strategy, “sit on giant pile of cash for year and chuckle like Scrooge McDuck in his Money Bin.”
And though there are no further specifics save the prediction that this windfall will boost an investment in [Yahoo] by 153%, they also suggest that there are other ways to profit from this IPO:
“The first bonus play is yet another small company that figures to reap about $58 billion from the IPO. I expect its share price will get a sizeable boost – and fast.”
“Small company” my hiney — this one is Softbank (SFTBY for the ADR), the Japanese tech conglomerate run by Masayoshi Son (they’ve been in the news lately as well, following their effective merger with Sprint last Summer), and they are not small. Softbank invested about $20 billion in Sprint, and has a market cap of roughly $80 billion… probably a bit smaller than Alibaba will be if the optimistic projections about their share price are correct, but certainly not small (or even medium sized) in any way. Softbank owns even more of Alibaba than Yahoo does (this is why Alibaba is still not public — they got large investments from Yahoo and Softbank many years ago, so they didn’t need capital to grow), but is not selling any Alibaba shares in the IPO (recent speculation has been that the IPO will price at $72 a share, which Barron’s says would mean Yahoo’s stake is worth $37 billion, Softbank’s $57 billion.
So Yahoo will be cashing in to at least some degree, and has substantially more exposure to Alibaba as a percent of market cap (Yahoo’s market cap right now is $35 billion, and they have a billion or two of net cash on their books as well), partly because the after-tax value of Yahoo’s major assets (Alibaba and Yahoo Japan, which they own in partnership with Softbank) is so unclear… not just because we don’t know how much the taxes will be if and when Yahoo completes an “exit” of those holdings, but also because both are private companies with little disclosure and are difficult to