Headquartered in Hangzhou, China, Alibaba is an Internet-based e-commerce retail

Question

Headquartered in Hangzhou, China, Alibaba is an Internet-based e-commerce retailer that is twice as large as eBay and Amazon combined. Handling about half of all online transactions in China, Alibaba does in China what PayPal and Amazon do in the United States. Alibaba operates Taobao, a consumer marketplace with millions of small Chinese merchants. Recently, Alibaba acquired Silicon Valley startup company, TangoMe Inc., a mobile-messaging firm in the United States that offers popular apps used to make free video calls. TangoMe competes with WhatsApp, recently acquired by Facebook. Alibaba is also an online bank and cloud-computing firm similar to E-Trade and Google. Alibaba’s largest website, Taobao, has about 760 million product listings from 7 million Chinese sellers. It is free for merchants to sell products through Alibaba, but they pay Alibaba an advertising fee to get exposure. The no-fee strategy is very popular in China. Taobao is mostly for small merchants, whereas Tmall, another shopping site owned by Alibaba, caters to large merchants. Together, Taobao and Tmall account for more than half of all parcel deliveries in China. Alibaba is much more profitable than Amazon but has less revenues because it does not sell products.

Recently, Alibaba launched the largest Internet IPO by a Chinese firm in the history of the United States and the largest IPO ever by any firm, raising $21.8 billion in its single-day IPO. Alibaba’s stock price rose 38 percent in its trading debut on the New York Stock Exchange (NYSE). Alibaba broke with tradition by offering five banks equal billing to host their IPO: Credit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group, P. Morgan Chase, and Morgan Stanley.

Alibaba is growing both organically (internally) and externally through acquisitions, continually diversifying into related high-tech industries. With 80 percent of China’s entire e-commerce market business, Alibaba recently acquired AutoNavi for $1.13 billion and ChinaVision Media Group for $804 million. Alibaba is spending heavily to adapt its e-commerce platform to mobile apps. The com- pany has also turned its Taobao Travel business into an Alitrip online travel website than now competes heavily with Bellevue, Washington-based Expedia and Shanghai-based Ctrip.com.

In late 2014, Alibaba sold about $8 billion in bonds, the largest Chinese corporate-debt offering of the year, and equals the $8 billion bond sale by Walgreen in late 2014 to help finance its acquisition of European drugstore chain Alliance Boots GmbH. Companies such as Alibaba (and Walgreen) desire to take advantage of low interest rates to lock in favorable borrowing costs.

Questions

1. How does a company decide among common stock, corporate bonds, and bank debt to raise needed capital?

2. Diagram the relationship between $ equity financing and $ bond financing for Alibaba, Amazon, and Google. What is the relationship on average for large, Internet-based technology companies? Discuss procedure and implications.

Explanation / Answer

1Answer:

1.Control is a limitation. When the additional stock is issued to finance strategy implementation, ownership and control of the enterprise are diluted. This can be a serious concern in today’s business environment of hostile takeovers, mergers, and acquisitions. Dilution of ownership could be a problem, and if so, the debt could be better than stock regardless of determined EPS values in the analysis.

2.Timing is a limitation. If interest rates are expected to rise, as they are doing in2015, then debt could be better than stock, regardless of the determined EPSvalues in the analysis.In times of high stock prices, a stock may prove to be the best alternative from both a cost and a demand standpoint.

3.Extent leveraged is a limitation.If the firm is already too highly leveraged vs.industry average ratios, then the stock may be best regardless of determined EPSvalues in the analysis.

4.Continuity is a limitation.The analysis assumes stock price, tax rate, and interest rates are constant overall economic conditions.

5.EBIT ranges are a limitation.The estimated EBIT low and high values are estimates based on the prior year, plus the impact of strategies to be implemented.

6.Dividends are a limitation.If EPS values are highest for the “all-stock scenario,” and if the firm pays dividends, then more monies will leave the firm due to dividends if the all-stock scenario is selected

2Answer:

As of May 2015, Alibaba’s debt to equity ratio was 46 percent, so Alibaba is using equity a bit more than debt to finance its operations.However, rival Google’s debt to equity ratio is only 8, so Google is much less leveraged than Alibaba.Amazon’s debt to equity ratio is 150 percent, soAmazon utilizes debt much more than either Alibaba or Google.Companies make strategic decisions all the time regarding the use of debt vs equity.In mid-2015 interest rates remain low and stock prices remain high, arguably the best of both worlds, but every day brings surprises regarding financial markets and related political and economic events.

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