The Dealmaker Driving Alibaba's IPO
At 4:30 on a May morning, Joseph Tsai and three other executives of Alibaba Group Holding Ltd. gathered at a Hong Kong office. With the U.S. stock market just closed, it was time to submit the Chinese e-commerce giant’s prospectus for its initial public offering to the U.S. Securities and Exchange Commission. With bottles of Champagne at the ready, each executive typed a word of the company’s name on a computer. All four then hit the button, sending the 340-page document that began a process that’s likely to culminate soon in what may be the largest initial public offering ever in the U.S.
Alibaba Chairman Jack Ma is the visionary. Vice Chairman Tsai is the guy who stays up until 4:30 a.m. to get things done. As the company’s chief dealmaker, he helped transform Alibaba into a global powerhouse, leading negotiations for most of the early outside investments in the company, including $20 million from SoftBank. He’s also overseen dozens of acquisitions—including more than $4.6 billion worth so far this year, according to data compiled by Bloomberg—that have expanded Alibaba’s business into new territories: online mapping, department stores, and TV content.
The company posted a profit of $1.99 billion in the three months through June. Sales rose to about $2.5 billion. “Alibaba wouldn’t be where it is today without Joe Tsai,” says Porter Erisman, who worked in marketing and communications at Alibaba in the early days and just released a documentary on the company’s beginnings.
Tsai’s top priority now is to persuade investors to buy the company’s stock. He’s been involved in shaping every aspect of the offering, including the design of the company’s corporate structure and the choice of investment banks to underwrite the deal. Tsai will be well rewarded if the IPO is successful. His stake of 2.9 percent could be worth as much as $4.5 billion, based on analyst estimates of the company’s value. Through a spokesman, Alibaba, Tsai, and Ma declined to comment. People who have direct knowledge of the events, who asked not to be named, provided information for this story.
In a corporate structure Tsai helped devise, Alibaba will be governed by a group of 27 managers who will have the exclusive right to nominate a majority of the board of directors. Alibaba’s biggest shareholders, SoftBank and Yahoo!, support the arrangement, even though they will not have representatives in the management group. After two years of discussions with the company, Hong Kong’s Securities & Futures Commission rejected the proposal, ruling that it gave too much power to a small group of shareholders. That decision led the company to move its IPO to the New York Stock Exchange; the SEC has not objected.
China prohibits foreign investors from owning shares of companies in certain industries, including the Internet. Chinese companies get around the restrictions by using variable interest entities, or VIEs, which give overseas investors the economic gains and losses of the China-based parts of the business through contracts rather than direct ownership. All of the major Chinese Internet companies that list on U.S. exchanges use the structure, including search firm Baidu, online retailer JD.com, and Weibo, a microblogging service.
Still, VIEs are in a legal gray area because China has no official rules governing their use, so Tsai took extra precautions to protect investors. Unlike earlier Chinese companies, which went public with as much as 99 percent of their revenue assigned to the VIE, less than 12 percent of Alibaba’s revenue and 8 percent of its assets are allocated to its VIE. “Alibaba Group is one of the best in terms of minimizing the amount of business conducted in the VIE,” says Paul Gillis, a professor at Peking’s Guanghua School of Management.
Born into a family of prominent lawyers in Taiwan in 1964, Tsai came to the U.S. when he was 13. He spoke little English when he enrolled in the Lawrenceville School, an elite boarding school in New Jersey. By the time he graduated, he had no accent and was playing lacrosse. He went on to play the sport at Yale, where he defied conventional jock protocol by wearing a pink triangle on his chest in support of gay rights. When members of the team teased him, he replied that it was just the right thing to do. “Joe always did what he thought was right,” says Jeff Gordon, a teammate. “And he was a steadying presence for all of us.” An Alibaba spokesman says Tsai now prefers to avoid commenting on political and social issues.
After graduating from Yale Law School in 1990, Tsai worked as a tax attorney at Sullivan & Cromwell in New York. Three years later he went to work at a small buyout firm, doing deals, then moved to Hong Kong for the Swedish holding company Investor. It was in this role that he first met Ma in 1999 in Hangzhou, China, after being introduced by a friend. He was so impressed with Ma’s energy and drive that he quit his $700,000-a-year job at Investor to help launch Alibaba. Tsai, the only Western-educated member of the management team, served as the company’s chief financial officer for more than a decade before becoming vice chairman in 2013.
In mid-July, Tsai juggled his IPO responsibilities while watching the World Lacrosse Championship in Denver, where the Hong Kong and Chinese teams that he helped build were playing. Gordon, who stays in touch with Tsai through his Facebook account, attended the games with him. “He hasn’t changed one iota,” Gordon says. “Did I expect him to be a very significant contributor to the world’s economy in some way, shape, or form? Of course. It’s how hard he worked, how smart he was, his ability to see differences in others and become their brother.”