By Liana B. Baker, Elzio Barreto and Olivia Oran
(StartName) – Alibaba Group Holding Ltd’s desire to keep tight control over its $21.1 billion share sale has left a vacuum at the helm of its banking syndicate, leading underwriters to take unusual steps to manage the offering, according to sources familiar with the situation.
Typically, initial public offerings have a “lead left” bank that controls the process, sometimes as a first among equals in the syndicate. Facebook Inc, for example, had Morgan Stanley in that role, while Twitter Inc used Goldman Sachs Group Inc for the job.
Alibaba, however, decided to do without one bank in charge of its IPO, and instead is seeking advice from all its major bookrunners.
The move gives Alibaba control of the process as no one bank has a complete picture of what is going on. It also helps avoid potential pitfalls of relying too much on one institution. Facebook’s botched 2012 IPO was also one of the reasons for this choice, sources have previously said.
But it has led to a complicated arrangement and left some bankers complaining that it has created additional layers of work, the sources said.
Alibaba declined to comment.
To make sure that the process goes smoothly, Alibaba’s six bookrunners have paired up and divided tasks among them, the sources said. The teams include: Credit Suisse Group AG and Citigroup Inc, Goldman Sachs Group Inc and Deutsche Bank AG, and Morgan Stanley and JPMorgan Chase & Co, the sources said.
All the banks declined to comment.
The entire syndicate has been divided into three tiers, with the six joint bookrunners on top, followed by eight banks that have been invited to analyst meetings and have prepared analysis to help value Alibaba. A third tier of banks will help sell the deal, according to one of the sources.
While bankers working on the deal said the process was working smoothly, some sources said the system was not very efficient. Since firms were working on individual tasks, there was not one bank that had an overall view of how the process was going, they said. Also, because they all had to report to the rest of the group, it made the process longer and more repetitive, they said.
Rothschild, which does not have any underwriting operations, is also advising Alibaba on the offering as an independent equity adviser, serving as a middleman between the company and the underwriters.
Alibaba has also negotiated lower underwriting fees. The company will pay underwriting fees of about 1 percent, which would yield some $211 million for all the banks on the deal, the sources said. That is far less than the 7 percent that smaller deals typically generate, or the 2 to 3 percent for larger offerings.
Facebook, which raised $16 billion in its IPO, paid 1.1 percent in fees, while a much smaller listing by Twitter last year paid 3.25 percent. Alibaba’s main Chinese rival, JD.com Inc, agreed to pay banks 4 percent when it went public in New York in May.
The low fees for Alibaba have been partly credited to work by Joe Tsai, Alibaba’s executive vice chairman, and Michael Yao, a former Rothschild banker who heads Alibaba’s corporate finance division.
One source described both Tsai and Yao as “tough negotiators,” but they also had more leverage than most other executives.
Alibaba could be valued at up to $163 billion in one of the biggest IPOs of all time. The company accounts for about 80 percent of all online retail sales in China, where rising Internet usage and an expanding middle class helped the company generate gross merchandise volume of $296 billion in the 12 months ended June 30.
Banks have been drawn to the deal both by the prestige of working on such a large IPO and by the chance to participate in Alibaba’s future deals. It is unlikely any other company will hold such heft.
The bulk of the fees, about 80 percent of the total, will go to the six main underwriters of the IPO. Of those, five are expected to take 15 percent each of the fee pool, or around $32 million apiece. Citigroup, the sixth bookrunner, will receive only about half that amount because its role in the offering is smaller than others, the sources said.
Rothschild will earn $9 million for its role, according to Alibaba’s securities fillings.
Alibaba expects to price the IPO at $60 to $66 per American Depositary Share and list on the New York Stock Exchange later this month. The company is currently in the midst of a multi-city marketing blitz to drum up demand for its shares, which are expected to price on Sept. 18.
(Reporting by Liana B. Baker and Olivia Oran in New York and Elzio Barretto in Hong Kong; editing by Bernard Orr and Matthew Lewis)