BofA Said to Profit From Alibaba Even After IPO Snub

Bank of America Corp., one of the few large banks that isn’t working on this week’s initial public offering of Alibaba Group Holding Ltd., has found another way to make a buck on the deal.

The Charlotte, North Carolina-based bank is giving investors a chance to bet on Alibaba’s performance by offering them a product that uses the e-commerce company’s largest shareholder, SoftBank Corp., as a basis for approximating Alibaba’s valuation. It strips out the main listed businesses that SoftBank owns -- Sprint Corp. and Yahoo Japan Corp. -- through short positions.

Bank of America has found takers as investors scramble for ways to profit from the biggest Internet debut since Facebook Inc., and the trades have earned the lender millions of dollars of commissions, people with knowledge of the matter said. Demand for Alibaba’s $21.1 billion IPO is strong enough that the company plans to stop taking orders earlier than scheduled.

An index Bank of America compiled that represents the synthetic Alibaba trade has tripled since a March 4 low, according to data compiled by Bloomberg. Bank of America typically charges investors as much as 1 percent of the size of each trade for structured products like the Alibaba one, in line with other banks, said one of the people, asking not to be identified discussing a private matter.

Bank of America, along with UBS AG and Barclays Plc, handled the the IPO of JD.com Inc., a Chinese e-commerce competitor, creating a conflict that kept them from working on Alibaba’s sale, people with knowledge of the matter said. The week-old road show to market Alibaba’s IPO hits Hong Kong today.

KDDI Short

Banks with lead roles on Alibaba’s IPO stand to make about $30 million each in fees, a person with knowledge of the matter said. Credit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and Citigroup Inc. have the most senior roles on the offering.

Those firms -- along with the 29 other banks that have more junior roles on the IPO -- are restricted from offering investors the same type of product Bank of America does.

Mark Tsang, a spokesman for Bank of America in Hong Kong, declined to comment on fees from the Alibaba product. Justin Dini, a spokesman for Alibaba at Brunswick Group LLC, declined to comment.

Bank of America’s Alibaba index includes a long position in SoftBank and short positions in Sprint, Yahoo Japan and KDDI Corp., data compiled by Bloomberg show. SoftBank, run by billionaire Masayoshi Son, owns stakes in Alibaba, Sprint and Yahoo Japan, and competes with KDDI in offering mobile-phone services in Japan.

Biggest Broker

The short position in KDDI is a way to “hedge out” SoftBank’s unlisted telecommunications operations, according to a Sept. 8 Bank of America note to clients.

About $500 million of these synthetic Alibaba securities are outstanding, said people with knowledge of the matter. Bank of America’s Merrill Lynch unit is the biggest broker of SoftBank stock so far this year, accounting for about 15 percent of total volume as of last week, data compiled by Bloomberg show.

People who sell short borrow a security and hope to profit by repurchasing it later at a lower price and returning it to the holder.

Bank of America is ranked seventh in managing IPOs globally this year. Goldman Sachs is the top underwriter of initial share sales, followed by Morgan Stanley, according to data compiled by Bloomberg.

At the top end of the marketed price range of $60 to $66 a share, Alibaba’s IPO would be the largest in U.S. history. Including an overallotment of shares to underwriters, known as a green shoe option, could take it past the sale of Agricultural Bank of China Ltd. as the world’s biggest ever.