When Investors Buy Alibaba Shares, They Won't Get What They Paid For

Sep 12, 2014
Originally published on September 12, 2014 6:32 pm

When the Chinese e-commerce company Alibaba goes public, it's going to the biggest public offering ever. When investors buy their shares, however, they won't be buying an ownership stake in Ali Baba's profitable websites. Instead, they will be buying shares in a holding company based in the Cayman Islands. It's illegal for Chinese Internet companies to accept investment from outside the country, but Alibaba has found an ingenious way to still get the $20 billion they want from outside investors.

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Transcript

ROBERT SIEGEL, HOST:

China's biggest tech company, Alibaba, is going public next week. It will be the biggest public offering ever on the New York Stock Exchange. It's expected to raise more than $20 billion. There's something unusual about this offering though. People are not technically buying actual shares of Alibaba. They're buying shares in Alibaba Group Holding Limited in the Cayman Islands. Zoe Chace of our Planet Money team explains.

ZOE CHACE, BYLINE: Before I get to Alibaba in this odd arrangement, we need to talk about what it means to buy a share of a company. If you buy, say, a share of Jamba Juice...

JEFF SICA: A share of Jamba Juice right now is $14.24. It trades on the NASDAQ under symbol JMBA.

CHACE: Jamba.

SICA: Jamba.

CHACE: This is Jeff Sica. He buys and sells stocks. So if you gave him $15...

SICA: Congratulations, you're a shareholder of Jamba Juice.

CHACE: Now, this is the question. What does that mean?

SICA: What that means is you're a part owner.

CHACE: You own a tiny fraction of their stores' blenders, the Razzmatazz, the Mango-A-Go-Go, the headquarters in Emeryville, California. Next week, if you go to buy a share of Alibaba, it's a completely different thing. You don't own part of their Internet servers, their desks, their ping-pong tables, because legally you don't own a share of that company. The Chinese government does not allow outsiders to own certain kinds of Chinese companies - media, education, the Internet.

PAUL GILLIS: Because they influence public opinion.

CHACE: Paul Gillis, accounting expert in Beijing, talked me through how Alibaba got around this restriction. It's kind of ingenious.

GILLIS: The foreign investors buy shares in a Cayman Islands company outside of China.

CHACE: The Cayman Islands company is Alibaba Group Holding Limited - the thing that's going to be traded on the New York Stock Exchange. Its address is the fourth floor of a shiny white office building called the Trident Trust - a couple palm trees outside.

GILLIS: That Cayman Islands company sets up a subsidiary in China.

CHACE: Those subsidiaries have contracts with the actual Alibaba websites that are so profitable.

GILLIS: Such as Taobao and Alibaba.com.

CHACE: The contract states that profits from Taobao, the eBay of China and Alibaba.com, the bigger than Amazon, Amazon of China, will flow back to the investors in the Cayman Islands company. Next week, a whole bunch of Americans are going to own this Caribbean holding company - really a set of promises to share in the profits of Alibaba.

GILLIS: What you have is a contract that gives you certain rights. And those rights may not be as good as the rights of actually owning something.

CHACE: The contracts, Paul Gillis points out, have never been upheld in a Chinese court. They are a dodge around a serious Chinese law. But still lots of Chinese companies that are listed over here do this sort of thing. And investors like Gary Bradshaw of Hodges Capital Management in Dallas - he says he's going to buy anyway.

GARY BRADSHAW: Yeah, there's a little bit of fuzz on it that, you know, we're not really comfortable with. But, you know, I would think that Alibaba will turn out to be a good stock.

CHACE: Risky - but investors like risk. That's kind of the point. Zoe Chase, NPR News. Transcript provided by NPR, Copyright NPR.