Alibaba Group Holding Ltd. is planning to award about one-third of the fees for its initial public offering in the form of incentive bonuses to coax better performance from underwriters, people with knowledge of the matter said.
China’s largest e-commerce company plans to pay at least 1.1 percent of the total IPO proceeds in fees, two people said, asking not to be identified discussing private information. Estimates of Alibaba’s valuation suggest the company could raise as much as $20 billion in the sale, making the potential fee pool more than $220 million. While the e-commerce giant is preparing for an IPO in New York, performance incentives are common in Hong Kong and have been used by companies including Agricultural Bank of China Ltd.
In U.S. IPOs most of the fees typically go to one or two firms picked to lead a sale, and the breakdown is agreed to ahead of time. That arrangement reflects the power that bankers hold over companies during the IPO process, according to University of Notre Dame Professor Tim Loughran. It can also leave banks tempted to serve a different client than the company: the fund manager who regularly buys into IPOs and is seeking to pay as little as possible for the stock, he said.
“High-quality work should be rewarded, so this is very much a positive,” said Loughran, a professor of finance. “Companies like Alibaba, that have more power, can get away with this stuff because in the negotiations they’re in the driver’s seat. For most IPOs in the U.S., it’s the reverse: the bankers are the drivers.”
Alibaba is expected to file for the IPO as soon this month, the people said.
Alibaba’s management, led by founder Jack Ma, opted for a performance incentive to give all underwriters a stake in the IPO’s success, one person said, asking not to be identified discussing confidential information. The fee structure hasn’t been finalized and may change before the deal kicks off later this year, two people said.
While Alibaba hasn’t said how much it will seek in the IPO, a person with knowledge of the matter said the company may sell about a 12 percent stake. That would make it an $20 billion deal, based on the $168 billion value assigned to Alibaba in a Bloomberg survey of analysts this week.
Alibaba’s fourth-quarter profit and sales surged, with net income attributable to ordinary shareholders more than doubling to $1.35 billion, while revenue rose 66 percent. Yahoo owns a 24 percent stake and its financial reports include the Hangzhou, China-based company’s earnings.
Under the current plan, about 30 percent of the IPO fees will be put in the incentive pool, to be allocated as Alibaba chooses after the deal, the people said.
Five underwriters playing key roles -- Credit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group Inc., JPMorgan Chase & Co. and Morgan Stanley -- are likely to see most of the incentive bonus, the people said. Citigroup Inc. also has an underwriting role on the deal, and other banks are likely to be added, the people said.
Spokesmen for Alibaba and the banks declined to comment.
Giving several financial advisers equal recognition is a practice common in Asia, unlike in the U.S. where banks compete for the lead-left role -- which describes where the bank’s name is printed on the offering documents -- and are in charge of advising the company on its biggest decisions.
In Hong Kong, companies going public typically pay incentive fees equivalent to 0.5 percent to 1 percent of deal size, said bankers familiar with the matter. Harbin Bank Co. paid a performance fee of about 0.5 percent on top of a 1.5 percent base commission in its $1.1 billion IPO last month, said two people with knowledge of the process.
“Discretionary incentive fees are helpful in that they help keep the lead banks on their toes until completion of an IPO,” said Philippe Espinasse, the former head of equity capital markets for Asia at Nomura Holdings Inc., and author of “IPO: a Global Guide.”
When Agricultural Bank went public in 2010, it withheld about $48 million of fees in the Hong Kong portion of the sale to be distributed among advisers based on performance, people familiar with the matter said at the time. The lender raised $12.1 billion in Hong Kong and another $10 billion in Shanghai.
The 1.1 percent fee is below the average 4.2 percent of proceeds underwriters have received in U.S. equity sales this year, data compiled by Bloomberg show. Investment banks are sometimes willing to accept a smaller share of proceeds for high-profile sales that can generate future business.
Facebook Inc. paid underwriters a 1.1 percent fee when it raised $16 billion in its 2012 IPO, data compiled by Bloomberg show. For that deal, 33 banks, led by Morgan Stanley, split about $176 million, according to filings on the deal.
Alibaba last month announced its decision to list in the U.S., after failing to persuade Hong Kong regulators to permit a proposed corporate governance structure that would have given management a greater say in board nominations.
The banks leading Alibaba’s sale have been assigned various tasks within the IPO process, two people said. Those could include drafting the prospectus, legal and financial due diligence, and shareholder communication. Certain assignments will make it easier for those banks to win the incentive-based fees, the people said.
“If a banker does more work, they should get more compensation,” Notre Dame’s Loughran said. “Incentives matter. The success will be drawn in the long-run.”