Alibaba's IPO Priced at $68 a Share

Alibaba's IPO Priced at $68 a Share
The $21.8 Billion Offering by the Chinese E-Commerce Giant Is Among Biggest Ever

Alibaba Group Holding Ltd.'s shares priced Thursday at $68 apiece, putting the Chinese company on track for an initial public offering that will raise at least $21.8 billion.

The price was at the top of the company's expected range of $66 to $68, which was increased from an initial $60 to $66.

The price gives the e-commerce company an initial market value of $168 billion, making it one of the 40 biggest public companies globally, according to S&P Capital IQ, and worth more than U.S. online- shopping giant Amazon.com Inc. Amazon is currently valued at $150 billion. 

Mr. Ma told investors that the move to separate key units from Alibaba, such as online-payment network Alipay, was one of the toughest decisions of his life, but necessary due to rules in China about foreign control of some types of assets, people at the meetings said.
Some analysts and investors have said the deal price gives the stock room to rise on the open market, though its performance could depend heavily on whether markets are volatile on Friday—possibly because of uncertainty around the long-term effects of Scotland's independence vote—and whether bankers correctly read the intentions of investors.The deal sets the stage for the shares to begin trading Friday on the New York Stock Exchange, under the ticker symbol BABA, an event expected to be watched by investors world-wide.

Another wild card: A group of early investors holding more than $8 billion of Alibaba stock aren't subject to a so-called lockup, an arrangement that typically restricts share sales immediately after an IPO.

Alibaba's founder and executive chairman, Jack Ma, Alibaba's top managers and their bankers have pitched the company over the past two weeks as an opportunity to invest in the growth of China's middle class, as more Chinese buy goods and services via the Internet and mobile phones, and to enjoy the profits generated by the company's "platform" model. The company connects buyers and sellers without the cost of holding inventory on its own.

With Mr. Ma joining presentations, including in the U.S., Hong Kong and the Middle East, the company fought back against criticism from some academics and investors who see great risk in Alibaba. Among the reasons for their concern is the fact that it operates in part through a series of "variable interest entities" in China that will be owned by senior executives, including Mr. Ma, rather than by Alibaba's foreign shareholders.

The company also faced questions about the way it concentrates its corporate power in a group of 30 partners, a system that barred it from listing in Hong Kong. Mr. Ma, in a public letter to investors, wrote that preserving the partnership culture was integral to Alibaba's future success.

At the IPO price, Mr. Ma will own a stake in Alibaba worth more than $13 billion. He also reaped $867 million in a sale of shares in the offering.

The initial deal size surpasses the $19.1 billion raised by Agricultural Bank of China Ltd. in 2010, according to Dealogic. Alibaba's IPO could raise as much as $25 billion if its underwriters exercise an option to buy more stock from the company and its selling shareholders. Agricultural Bank's IPO was valued at $22.1 billion after a similar option was exercised.

A committee made up of Mr. Ma, Executive Vice Chairman Joseph Tsai and representatives of SoftBank Corp. and Yahoo Inc., Alibaba's two largest shareholders, decided on Thursday's pricing, the people familiar with the matter said.

Also present at the final meeting were the six investment banks who led the deal—Credit Suisse Group AG, Deutsche Bank AG , Goldman Sachs GroupInc., J.P. Morgan Chase  & Co., Morgan Stanley and Citigroup Inc.  —the people added. The company also hired Rothschild to act as an independent adviser.

As a group, the 35 banks working on the offering will split a base pool of 1% of the deal's proceeds, or as much as $250 million, plus potentially 0.2 percentage points more, or as much as $50 million, in incentive fees, people familiar with the deal have said.

The five banks named first on the deal will each earn up to roughly $45 million in fees, depending on how the final incentives are allocated, they added.

Alibaba took the unusual approach of divvying up key jobs, instead of naming a single lead bank for the offering. On Friday, Goldman Sachs will oversee the opening trades, people familiar with the deal have said.

For the pricing, the company and its advisers adopted a strategy of starting relatively low, then nudging the price higher, people familiar with its thinking said. The aim was to build support for the stock from the biggest institutional investment firms, who tend to be most conservative on pricing because they have strict valuation models they follow. Their interests differ from those of faster-money traders who try to grab hot IPOs with fast-rising prices just to "flip" them for a quick profit.

The pricing strategy contrasted with that of Facebook Inc. FB +1.19% For its $16 billion IPO in 2012 the social network raised its range much more sharply and expanded the size of the deal. Moreover, Facebook put a relatively large portion of the IPO in the hands of small investors—about 26% of the offering, bankers said at the time.

Alibaba also hoped to stir up aftermarket demand by placing the stock primarily with large investors and giving only a small portion of it—likely less than a quarter of the deal—to midsize hedge funds and small investors, who will now have to trade in the open market to get shares, the people familiar with the process said.

The result was a price that was higher than where the company started, but still below where some analysts and investors have pegged it. Vince Rivers, a senior portfolio manager at JO Hambro Capital Management, said that most investors he spoke to expected the stock to trade "between $80 and $100" a share on its first trading day.

Companies are often concerned about underpricing their deals, effectively leaving money on the table. In this case, Yahoo, as the deal's biggest seller—offering up to 140 million shares, or $9.5 billion worth at the IPO price—would lose out.

But earlier this summer Alibaba agreed to let Yahoo sell less stock than originally planned, which was more than 200 million shares. That move helped Alibaba keep a free hand to price the offering attractively for the biggest investors, people familiar with the deal said.

On Friday, attention turns to the stock's opening trades. Mr. Rivers said the key variable for judging initial buyers' returns would be the volume of the opening trades, rather than the actual price. "If you see it open with big volume, you're clearing out a lot of the potential sellers. But if it spikes up with no volume, then you might see it come back down quickly," he said.

While Facebook's opening trade actually came above its IPO price, the stock quickly fell back. It was hit by a technology glitch on the Nasdaq Stock Market, but also by a wave of selling from buyers who got more stock than they anticipated.