Greenberg: Alibaba Is Too Darn Complicated

This article appeared at 12:00 p.m. EDT on RealMoney Sept. 8.

SAN DIEGO (RealMoney) -- Alibaba, not surprisingly, is likely to be a hot deal. And, not surprisingly, most investors -- especially those who trade the deal -- are unlikely to crack open the prospectus. (I'd go so far as to say most don't know what a prospectus is, but I digress.)

If they do, there will be no way they will be able to say with certainty that Alibaba is an analyzable company (certainly not for those who intend to invest in the company rather than play the stock).

Ignore the pictures of founder Jack Ma and the smiling people. Ignore the colorful charts and the tables showing how fast the company is growing and how big its potential market is.

They're all an effort to get you to gloss over just how complicated Alibaba really is, and complicated often equals trouble.

Any efforts to untangle this company require more than any old genie. They requires a forensic accounting genie.

And never mind the one-time expenses, payments and investment gains.

Alibaba is just too darn complicated, starting with the footnotes. Footnotes are common in financial filings, but when it comes to footnotes reconciling the various financial statements, Alibaba takes them to a new level, such as these below the consolidated financial statements:

In fiscal year 2014, these expenses included an equity-settled donation expense of RMB1,269 million (US$205 million) relating to the grant of options to purchase 50,000,000 of our ordinary shares to a non-profit organization designated by Jack Ma and Joe Tsai.

We entered into the Technology and Intellectual Property Licensing Agreement with Yahoo, or the Yahoo TIPLA, in October 2005, pursuant to which we pay royalty fees to Yahoo. We and Yahoo amended the existing TIPLA in September 2012, pursuant to which we made a lump sum payment in the amount of US$550 million.

Pro forma earnings per share attributable to ordinary shareholders is calculated as if our convertible preference shares had been converted into ordinary shares at the beginning of the period, or when the convertible preference shares were issued, if later.

See "— Non-GAAP Measures" below.

For the three months ended June 30, 2014, includes a net gain of RMB6,251 million (US$1,008 million) from step-up acquisitions arising from revaluations of previously held equity interest. See note 4 to our unaudited interim condensed consolidated financial statements for the three months ended June 30, 2014.

And then there are the footnotes needed to define the various components of revenue:

Revenue from China commerce retail is primarily generated from the Company's China retail marketplaces.

Revenue from China commerce wholesale is primarily generated from 1688.com and includes fees from memberships and value-added services and online marketing services revenue.

Revenue from International commerce retail is primarily generated from AliExpress.

Revenue from International commerce wholesale is primarily generated from Alibaba.com and includes fees from memberships and value-added services and online marketing services revenue.

Revenue from cloud computing and Internet infrastructure is primarily generated from the provision of services, such as data storage, elastic computing, database and large scale computing services, as well as web hosting and domain name registration.

Other revenue mainly represents interest income generated from micro loans.

Then there's my personal favorite, the text associated with the chart on page 11 attempting to break down the company's structure.

It begins:

We conduct our business operations across approximately 290 subsidiaries and other consolidated entities. The chart below summarizes our corporate legal structure and identifies our significant subsidiaries as that term is defined under Rule 1-02 of Regulation S-X under the Securities Act, as well as our variable interest entities that are material to our business, and the number of their respective subsidiaries, as of the date of this prospectus.

But, as usual, the devil is in the detail -- the footnotes:

Includes approximately 70 subsidiaries and consolidated entities incorporated in China and approximately 120 subsidiaries incorporated in other jurisdictions that are not illustrated in this chart. In addition, the entities pictured in this chart hold, directly and indirectly, an aggregate of approximately 40 additional subsidiaries and consolidated entities incorporated in China and approximately 40 additional subsidiaries incorporated outside of China not pictured in the chart.

Primarily involved in the operation of Taobao Marketplace.

Primarily involved in the operation of Tmall and Juhuasuan.

Primarily involved in the operation of Alimama.

Primarily involved in the operation of Alibaba.com, 1688.com and AliExpress.

Primarily involved in the operation of cloud computing services.

Each of these variable interest entities is 80%-owned by Jack Ma and 20%-owned by Simon Xie, other than Zhejiang Taobao Network Co., Ltd., which is 90%-owned by Jack Ma and 10%-owned by Simon Xie.

And this is just scratching the surface.

None of this means Alibaba won't be a successful IPO and a great stock and company. It just means if you invest in it, you're not likely to know what you really bought.

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Herb Greenberg, editor of Herb Greenberg's Reality Check, is a contributor to CNBC. He does not own shares, short or trade shares in an individual corporate security. He can be reached at herbonthestreet@thestreet.com.

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