Alibaba Founders to Keep Control With Partnership AlternativeLeslie Picker
If one-share-one-vote is the best ownership structure an investor can ask for, and having two classes of shares is worse, Alibaba Group Holding Ltd. will fall somewhere in between.
The Chinese company, expected to file soon for a U.S. initial public offering, wants to give a group of insiders the exclusive right to nominate a majority of the board. Unlike the dual-class model used by companies from Zynga Inc. and Groupon Inc. to New York Times Co. and Manchester United Plc -- where a minority shareholder wields disproportionate voting power -- Alibaba plans to give all shares otherwise equal weight.
Companies using dual-class structures have underperformed as investments by almost one-third over the long run, according to a study by Institutional Shareholder Services Inc., and T. Rowe Price Group Inc. is calling for changes that would phase out the dual-class structure following a company’s IPO. Granting insiders some control while giving shareholders an equal say on most matters is an idea that could be replicated, said Eric Jackson, president of Ironfire Capital LLC.
“Alibaba’s approach may well get copied if it does prove to build more of a shared sense of ownership,” said Jackson, whose hedge fund has offices in the U.S., Canada and China. “Investors, when forced to choose between a potentially high growth company and a modest one with good governance, will opt for high growth every time.”
Ashley Zandy, a spokeswoman for Hangzhou-based Alibaba, declined to comment on the IPO plan.
The purpose of the partnership structure is to allow Alibaba’s managers to dictate strategies for the company without short-term distractions, co-founder Joe Tsai said on the company’s blog last year. Shareholders will still be able to nominate a minority of directors, and vote on all board nominees and other major decisions.
The partnership structure may still put too much control in the hands of a few people, while leaving shareholders in the dark, according to Jeff Sica, president of Morristown, New Jersey-based Sica Wealth Management LLC.
That could be a problem given Alibaba’s complex structure -- outside of its primary e-commerce businesses it has investments ranging from mapping technology to Internet content providers -- and the fact that U.S. investors won’t have as much insight into the company’s Chinese operations, he said.
“I think Alibaba will be a disaster from an understanding perspective,” said Sica, whose wealth-management firm oversees $1 billion in assets. “Most of these investors are looking at dual-class structures as they apply to U.S. companies, with a level of transparency that’s expected.”
Alibaba has faced complaints from shareholders in the past. In 2010 it transferred ownership of its Alipay online payment unit to a company controlled by founder Jack Ma, a move that led to a dispute with shareholder Yahoo! Inc., which said it didn’t learn of the transfer until seven months later.
Companies defend the control structures because they make for an easier transition into a publicly traded entity. They’re particularly popular with technology companies that are driven by the vision of their founders -- such as Facebook Inc.’s Mark Zuckerberg and Google Inc.’s Larry Page and Sergey Brin. Google now has three classes of stock.
On the New York Stock Exchange, 62 companies have dual-class structures -- about 2.6 percent of the total -- while the Nasdaq Stock Market counts 4.5 percent as having multiple classes, according to data provided by the exchanges.
T. Rowe Price, the Baltimore-based manager of about $700 billion in assets, is advocating for companies to make it easier to repeal dual-class share structures over time. For example, the superior voting rights could be subject to an expiration date, a binding vote of the shareholders in the future, or a gradual conversion to common stock, Donna Anderson, vice president of corporate governance at T. Rowe, said by e-mail.
“Dual-class structures are virtually impossible for shareholders to dismantle,” she said.
The average total shareholder return for companies with multiple classes of shares was less than 10 percent during the decade through August 2012, compared with more than 14 percent for companies with a single class, according to an October 2012 study from ISS. They also showed greater stock-price volatility, weaker accounting controls and more conflicts in business dealings, the study found.
“This partnership idea was a middle ground between one share, one vote and dual class,” said Moshe Cohen, a professor of finance and economics at Columbia Business School. “It’s trying to find some balance.”
While Alibaba had sought to list its shares in Hong Kong, the partnership structure isn’t permitted there. After failing to persuade local officials to make an exception, the company announced its decision to go public in the U.S. in March.
Ultimately, Alibaba’s rapid growth is going to draw investors no matter the objections to its control structure, said Ironfire’s Jackson.
Alibaba’s market value was estimated at $168 billion in April, according to a Bloomberg survey of analysts, compared with $35 billion just a few years ago. Its earnings more than doubled in the fourth quarter of 2013 from a year earlier.
Having had plenty of success with both Facebook and Google, investors know what they’re getting into, said James Post, a professor at Boston University School of Management. Facebook has gained almost 60 percent in the two years since its IPO, and Google’s stock has surged about 75 percent during that period.
‘If they want to play in the space that Google and Facebook and Alibaba inhabit -- this is the price of getting into that game,’’ said Post. “Part of what investors are investing in is Jack Ma and the management team, just as they were investing in Zuckerberg and Page.”
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