Alibaba IPO: 3 risks investors should know

By John Spence

Alibaba Group Holding Ltd., the Chinese e-commerce giant, is set to price its shares after Thursday's closing bell, and the highly-anticipated IPO could be the largest in U.S. history.

With so much fawning media coverage of the Alibaba IPO, investors could get sucked in by the fanfare. Therefore, it makes sense to step back and consider the risks of investing in Alibaba.

risks-of-investing-in-alibaba-ipo

 

But first, some background on the IPO details, and what Alibaba actually does.

Alibaba is expected to sell an estimated $22 billion of shares before Friday's IPO on the New York Stock Exchange. Demand for the shares is reportedly strong and the stock could see a pop during the first day of trading Friday.

The company was founded by Jack Ma and has a diverse array of businesses, including B2B web portals, online retail, shopping search engines, and cloud computing. (For more background, see Alibaba IPO: 6 things you need to know.)

"It's easy to get caught up in the emotion and hype of an IPO of this magnitude, but, there are plenty of risks," says Dennis Hobein, an equity analyst at Briefing.com.

Let's zero in on 3 of those risks:

1) Fuzzy corporate structure

Many investors are questioning the corporate governance and opaque ownership structure at Alibaba.

First off, due to Chinese restrictions on foreigners owning certain assets, Alibaba is structured as a "variable interest entity."

"Basically, the Alibaba stock will buy you a stake in a Cayman Islands-registered entity which is under contract to receive the profit from Alibaba's lucrative Chinese assets but will not actually own them," MarketWatch reports.

The structure means that the assets and the company will be controlled by Ma and co-founder Simon Xie. Investors are expected to have little or no say on major decisions.