The giddy gold-rush mindset gripping Wall Street in the run-up to the record-setting Alibaba IPO represents a spectacular victory for the Chinese variant of state-controlled “command” economics — a triumph made all the more amazing by the Cayman Island shell company shadow play America’s captains of finance were willing to tolerate to get their piece of the Alibaba pie. When the dust cleared, the NYSE had helped Alibaba raise $25 billion dollars — an amount so huge that the underwriting commissions alone came to $300 million. It would be remarkable for any foreign company to launch such a successful IPO in the heart of American finance. For Alibaba — an e-commerce entity whose very existence is subject to the whims and patronage of the ruling and nominally Communist Chinese bureaucracy, and whose IPO gives every appearance of having been carefully (and clandestinely) stage-managed to benefit a wide swathe of China’s ruling elite — snatching such an important “free market” crown is a stunning and seemingly self-contradicting feat, one that highlights aspects of our own financial system that could be considered both economically and politically perverse. This was actually Alibaba’s second IPO, not that most of the reporting mentioned it. The first, in 2007, was on the Hong Kong exchange. (The stock from this initial initial public offering was bought back by Alibaba in 2012, in anticipation of the current investor blitz.) This may come as a surprise even to dedicated China watchers, because Hong Kong has been defined in the recent press almost solely by its having “lost out” on the current Alibaba IPO as a result of its strict “one share, one vote” governance requirement for all listed companies — a policy designed to protect small investors. In the run up to Alibaba’s second IPO, the company asked Hong Kong for an exemption, allowing it to retain its current and somewhat shadowy partnership system, under which a small group of stakeholders can select the majority of the company’s directors without controlling a majority of its shares. Hong Kong refused to bend its regulations. So Alibaba’s second IPO was made on the NYSE. Setting aside the irony that a Chinese stock exchange has stronger rules for protecting shareholder democracy than the American one, it should be pointed out that there’s nothing inherently sinister about a “dual-class” stock system. (Or, rather, that there’s nothing more than usually sinister inherent in it.) As AP business writer Kelvin Chan haspointed out, American tech titans, including Facebook and Google, empower a privileged class of stockholders by a similar mechanism. Like freedom itself in the old patriotic cliche, American corporate governance practices aren’t free. However, what matters more than the undemocratic shareholder structure Alibaba fled to New York to preserve is an as-yet-unanswerable question: Whose control is Alibaba protecting, exactly? And here’s where things get interesting — and worrisome. Despite the general impression that Alibaba just made a U.S. stock offering, not one share in Alibaba itself has been sold through the New York Stock Exchange. This is because foreigners are not allowed to own even a scintilla of a major Chinese company without permission from the Chinese government. To skirt this problem, Alibaba created a shell company called Alibaba Group Holding Limited, headquartered in that offshore financial laundromat favored by both Mitt Romney and the Medellin cartel: The Cayman Islands. Shares in the Cayman-based Alibaba Group are what just set an IPO record. Despite their high price, they are essentially profit participation vouchers. They confer no participation in Alibaba governance, and indeed no actual ownership of Alibaba, causing one financial wag to refer to Alibaba Group buyers as potential “stuckholders.”
Posted on: Sun, 12 Oct 2014 14:11:53 +0000
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