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A U.S. Alibaba IPO could still be good for Hong Kong

September 25, 2013: 11:17 AM ET

As long as Alibaba uses its unorthodox structure sensibly, its preference for New York over Hong Kong may be a good outcome for both cities.

By Peter Thal Larsen and Rob Cox, Reuters Breakingviews

reuters_breakingviews_logoFORTUNE -- Chinese e-commerce company Alibaba Group Holding Ltd has decided to hold an initial public offering in New York after talks with Hong Kong regulators broke down over a listing in the Asian financial hub, two sources familiar with the discussions told Reuters.

"We've come to the end of dialogue with Hong Kong and we're pivoting to the U.S. to start the listing process," a company source familiar with the discussions said. Alibaba has engaged U.S. law firms to start working on its IPO and will soon be hiring banks to manage the listing, added the company source, who was not authorized to speak publicly on the matter.

Officials at Alibaba and the Hong Kong stock exchange declined to comment.

Silicon Valley has shown that going public needn't mean giving up control. Though the founders of Google (GOOG) and Facebook (FB) no longer own a majority of their companies, they exercise authority through super-voting shares that give them a bigger say than outside investors.

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As the founder of China's biggest internet company, Alibaba Chairman Jack Ma is also keen to protect the company from the influence of unwanted outsiders agitating for short-term change. But the Hong Kong stock exchange requires all shareholders to be treated equally. As a result, the e-commerce group proposed giving a group of senior executives -- known as the partnership -- the right to nominate a majority of the directors on its board. Outside investors would still be able to vote against any proposed directors they felt did not meet the grade. But they would not be able to install their own candidates.

Alibaba argued that its structure was no less shareholder-friendly than the Hong Kong tycoons who can maintain control over their empires through cascades of partially-listed subsidiaries. But Hong Kong IPOs must pass muster with the exchange's listing committee and the Securities and Futures Commission. Regulators concluded that the partnership would still exercise control despite holding just 13% of the shares, and refused to make an exception. Alibaba is now considering a listing in the United States, probably early next year.

Losing what would have been the biggest IPO of the year is undoubtedly painful for Hong Kong. But its reluctance to bend the rules, even for a company of Alibaba's size, will only enhance its reputation in the long term.

Meanwhile, Alibaba's approach might actually raise the very low bar for listed internet groups in the United States. Though the partnership approach is less transparent than just issuing two different classes of stock, the company cannot entirely ignore its external shareholders. As long as Alibaba uses its unorthodox structure sensibly, its preference for New York over Hong Kong may be a good outcome for both cities.

Read more at Reuters Breakingviews.

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