Ali Baba Case Study Solution
Since Ali Baba is the leading E-Commerce provider in the world and its strategies are always based on local conditions and local customers. If its shares are traded publically, the number of investors would increase and control would be diluted. Also, after listing shareholders will have the right to appoint, remove anyone in the board and will receive the right to influence the strategies of the company. There is a chance that wrong strategies might be made on the recommendations of a shareholder who has the high equity stake in the business,but has no knowledge regarding markets, customer preferences and logistics. This will affect the long term sustainability of the business as its main objective of creating value for customers will not be achieved. Ali Baba has always focused on providing quality services instead of maximizing revenues however, after public listing it is possible that the business might have to take incorrect measures like quality cut to maximize profits and share price to satisfy their shareholders.
One of the core strengths of the company is focus on local markets and local customers. The new governance structure would ensure that correct decisions and strategies are made as they will have knowledge regarding Chinese markets, operations of the company because of their affiliation with the business and since control would be retained by the CEO, growth of the business will be guaranteed as he will make the right decisions.Therefore, it will be suggested that formation of partnership will be beneficial for the company.
Listing on New York Stock Exchange
The New York investors are excited about Ali Baba’s initial public offering as it is the leading E-commerce provider in the world and its profits have been growing since its foundation. The company has greater profits and it is likely that the business has high growth potential which ensures long term sustainability of the business. All these factors have made the business a target investment for the investors. Since the business has great profits, great returns and dividends will be provided to shareholders, investment will be secured as the business is sustainable.
Although, the investors will not enjoy any voting rights by purchasing the business’s shares due to the existing governance structure of the business, they will be able to enjoy other benefits like guaranteed dividends as profits are likely to increase in future due to the prediction that internet population in China will rise by 800 million in the year following the IPO. The investors will also enjoy intrinsic benefits like inner satisfaction as the investment is secured so chances of losses are minimum, therefore, investors are relieved form the stress of the declining share price and losses and the investors will also get recognition as the shareholder of the world leading E-Commerce provider.
The company priced its initial public offering at $68 per share and raised $21.8 billion, which is the largest offering in American history. The day the business’s shares went public on the New York Stock Exchange, the share price of Ali Baba increased by 36% which further increased the confidence of US investors (Luckerson, 2014)
The New York investors were also excited about the initial public offering as it was the only way of getting access to the Chinese growing technology market. Only two Chinese online platforms issued their shares publically in 2014, however, the other internet company, Tencent, had listed its shares on the Hong Kong Stock Exchange which is the reason why the American investors were enthusiastic about Ali Baba’s IPO on the New York Stock Exchange.(Luckerson, 2014)
Challenges Faced by Ali Baba’s Board Members
Since, there will be fewer partners on the board as a result of changing business’s governance structure to partnership, chances of disputes between the partners will be high as less people will be involved in management of the business, directors work load will increase, conflict regarding how resources should be used might increase. These issues will affect the operations of the business therefore, should be resolved by setting clear roles and lines of responsibility of board members.
The new governance structure of partnership requires new partners to be elected each year, however, since all the partners are required to hold high stake in the business, be associated with the business for more than five years and their actions should be aligned with the overall objective and vision of the organization, electing or finding a suitable partner might be difficult.
The organization also faces reputational damage from overseas suppliers and investors as many have argued that the new governance structure of the business reflects the Chinese political structure and authoritarian politics. Also, since the partnership structure gives no voting rights to the public shareholders, the business’s initial public offering on overseas stock exchange might fail restricting its ability to raise finance in the future.
Also, since after the formation of partnership, the CEO of the business Jack Ma will only hold 13% of the equity stake in the business(Pratley, 2014) and 87% shares will be owned by other partners and public shareholders. There is a risk that other partners might form a team and make sub optimal decisions like quality cut in order to increase profitability to ensure they get higher dividends and might adopt unfair practices effecting the overall image of the company. Since only 13% of voting rights will be held by Jack Ma, he will not be able to influence the decisions of majority partners.
Conclusion
Ali Baba is the leading E-Commerce provider in the world, the business has always emphasized on meeting the local customer and the local market’s needs. The business’s major sources of revenue are advertising, cloud computing, internet infrastructure services, anannual fee from buyers and key word bids. The business achieved success in China due to its unique business model, profit model, finance structure and emphasis on customer trust and effective communication between buyer and seller. The business’s IPO on the Hong Kong Stock Exchange was rejected after which the organization decided to form partnership under which public shareholder received zero voting rights. The business’s IPO on the New York Stock Exchange became a huge success. The business’s board member faced various challenges due to the change in its governance structure like increased conflicts between members, reputational damage, the formation of teams and lack of control by the CEO due to only 13% voting rights…………..
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