Chinese e-commerce powerhouse Alibaba is set for its IPO sometime this week, with a target price of between $60 and $66 a share and a $155 billion valuation. It could bring in an unprecedented $24.3 billion in cash, as CBS MoneyWatch has reported. And that was before reports that the company might raise the IPO price even more, potentially becoming the largest initial public offering ever, according to the New York Times, and certainly the biggest tech IPO, making Facebook's 2012 market debut look small in comparison.
But even as the salivary glands of big investors shift into high gear, there are indications that Alibaba could be reminiscent of Facebook in another way. There's a question of whether individual retail investors, the people who jump onto first day sales and help spike the share price, are inclined to participate. If they sit out the hoopla, it could be that, like with Facebook, the big investors don't see a first-day spike and miss the opportunity they expect to cash in.
All IPOs are structured to favor insiders and Wall Street investment banks. When a corporation wants to raise money for expansion and allow insiders and investors to gain some of the financial reward that initially got them involved, it often holds an initial public offering. Both the company itself and insiders sell shares to investment banks, which, in turn, sell the bulk of the shares to institutional investors. These include massive pension funds, mutual funds, and hedge funds. Brokerage houses typically get an allotment. Only a tiny number of well-connected individual investors get to purchase at the IPO price.
The insiders, big institutions, brokers, and well-connected individuals put some or all of their stock on sale afterwards. That is where regular individual investors get their shot at purchasing shares. It's also the point when supply and demand can drive up the prices, allowing the initial shareholders to turnover some of their shares and make a strong profit.
But it's unclear how excited small investors are, according to the Wall Street Journal. Financial advisors and brokers aren't fielding the usual flood of calls from them, which is what typically happen with hot stocks.
"The U.S. retail investor is not that interested because they don't know about the business of Alibaba," said Reena Aggarwal, a professor of finance and business administration at Georgetown University's McDonough School of Business and an expert in IPOs, in an interview with CBS MoneyWatch. "Facebook had that big name recognition in the U.S. and Alibaba has mostly been in the U.S. for its IPO, not its products." There have also been issues highlighted in the press, like alleged fraudulent transactions uncovered in 2011 and this summer's reported accounting scandal at the company's television and film production group.
Those factors, taken together, could make for a relatively weak start when trading opens, meaning that Alibaba may not get the first day bounce big investors like to see.
That said, Aggarwal thinks that there will still be strong demand for Alibaba stock by institutional investors who didn't get their fill. "It's such a large offering, it's going to be part of indexes eventually, so institutions have to hold it," she said. "To maintain a decent-sized position, they might buy in the aftermarket, some of them." In addition, because of the company's strong profits, the "price-to-earnings ratios are not that crazy."
So while there may not be a big bump, there may also not be the major drop in price that Facebook saw.