WSJ.Com Blog: Ali Baba Float & Legal Structures

We’ve seen this issue coming to the fore – WSJ blog is as good as any place to explore……

Alibaba Group Holding Ltd. BABA +38.07%’s legal structure and IPO allocations are some of the remaining points of discussion for investors in Asia ahead of the company’s trading debut Friday.

“They’ve done exceptionally well but it’s always hard to value a business such as this, at the best of times,” said Hugh Young, head of Asia for Aberdeen Asset Management ADN.LN -1.10% Plc, which manages roughly US$550 billion globally. He said Alibaba’s legal structure and corporate governance don’t meet the fund management firm’s criteria for investing.

Associated Press
Mr. Young said he is concerned by the “variable-interest entity,” or VIE, structure that Alibaba and some other Chinese firms are using to sell shares in the U.S. and circumvent government restrictions on foreign ownership of sensitive industries such as Internet and telecommunications. The structure splits the company into two entities: one, based in China, which controls licenses and other assets required to do business there. Foreign investors buy shares in the foreign-listed parent of the second entity, which is based offshore.

The set-up has drawn criticism from some corporate governance specialists, who argue that it gives foreign investors little control over some assets of the company.

A representative for Alibaba declined to comment, citing the company’s required quiet period during the IPO process.

Large, long-term investors like Aberdeen are among the most desirable buyers in an initial public offering. Still, the IPO has been met with strong demand, seeing shares priced Thursday at US$68 a piece, the top of an already-raised range. The stock begins trading Friday in New York under the ticker symbol BABA.

Investors in Asia that want in on the IPO will learn later Friday whether or not they got an allocation or not. The company’s decision earlier this year to list in New York rather than Hong Kong remains a sore point for the region. One hedge-fund manager who attended a meeting with company management this week in Hong Kong said Asian accounts are girding for smaller allocations in the IPO than their U.S. counterparts, a sentiment shared by other investors in the city.

“Everybody knows that the IPO allocations are not going to be great,” said Rahul Chadha, co-chief investment officer for Mirae Asset Global Investments, which manages roughly $65 billion. He’s hoping the stock “doesn’t do that well,” allowing further opportunities to build positions in Alibaba after it begins trading.

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