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SEC Adopts Long Awaited Rules for Asset-Backed Securities

Editor's Note: Theodore N. Mirvis is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. The following post is based on a Wachtell Lipton memorandum by Mr. Mirvis, Carrie M. Reilly, and Brandon C. Price.

Earlier this week, the SEC adopted significant changes to Regulation AB, which governs the offering process and disclosure and periodic reporting requirements for public offerings of asset-backed securities, including residential mortgage backed securities (RMBS). The revisions to Regulation AB were a long time coming—they were first proposed in 2010 and have drawn several rounds of comments from industry participants. Issuers must comply with the new rules no later than one year after publication in the Federal Registrar (or two years in the case of the asset-level disclosure requirements described below). The new rules do not address “risk retention” by sponsors which is the subject of a separate rule-making process.

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Categories: Governance

A Soaring Debut for Alibaba

New York Times DealBook - Fri, 09/19/2014 - 19:18
The Chinese Internet giant, which raised $21.8 billion in its stock sale, instantly became one of the biggest publicly traded technology companies in the world.
Categories: Transactions

Alibaba’s IPO, By the Numbers

Wall Street Journal MoneyBeat - Fri, 09/19/2014 - 16:34
Reuters

Alibaba Holding Group Ltd.'s initial public offering was one for the record books. Here’s a rundown of all the stats and trends you need to know about the Chinese e-commerce giant’s trading debut.

38%: The percentage Alibaba shares jumped on its first day of trading, closing at $93.89. The pop easily exceed the average 26% gain for U.S.-listed technology deals this year, according to Dealogic. Larger deals typically have smaller first-day “pops,” which makes Alibaba’s rally all the more impressive.

$231.4 billion: Alibaba’s market capitalization as of Friday’s close. If Alibaba was in the S&P 500 it would be the 11th biggest company in the index, according to S&P Capital IQ. Its market cap exceeds that of Procter & Gamble and J.P. Morgan Chase and falls short of Wal-Mart Stores Inc., which currently sports a market value of $245 billion.

Alibaba is now larger than every company in the Nasdaq Internet Index, with the exception of Google .

270.89 million: The number of Alibaba shares that changed hands on Friday. That made it the most heavily traded stock on the NYSE on Friday, and by a long shot. The second most-heavily traded stock was Rite Aid at 88 million shares, followed by Bank of America at 85 million.

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231.1 million: The number of Yahoo Inc. shares traded on Friday, the most since Microsoft Corp. dropped its bid to buy the Internet search giant in May 2008.

Alibaba’s 270.89 million shares traded were more than double the number of Twitter Inc. shares that changed hands during the microblogging site’s debut last November. That said, Alibaba’s volume was less than half that of Facebook 's during its first day of trading in May 2012.

10%: Only about 10% of the IPO went into retail channels, about two-thirds of which were set aside for friends, family, and employees designated by Alibaba itself, according to people familiar with the deal. Just a 4% sliver of the deal went out to broader channels for small investors—a contrast to the more than 25% set aside for Facebook Inc., General Motors Co., and Kraft Inc. in their IPOs.

To be sure, that broad retail portion represented was nearly $1 billion worth of stock – which itself would be a very large IPO. But it hardly satisfied demand for the deal. So investors who couldn’t buy shares in Alibaba’s IPO Thursday night anxiously waited at their computers Friday morning for a chance to buy a piece of the Chinese e-commerce company, even as shares at times neared the $100 mark.

$18.03 billion: The value of founder and executive chairman Jack Ma’s stake in Alibaba as of Friday’s close.

–Telis Demos contributed to this report.

Categories: Transactions

Podcast: Alibaba’s Red-Letter Day

Wall Street Journal MoneyBeat - Fri, 09/19/2014 - 16:32

Alibaba Group Holding Ltd.'s IPO went off without a hitch, a positive development that generated praise across Wall Street.

Paul Vigna

In the latest installment of MoneyBeat Week, our Friday podcast, the crew analyzed what’s next for the Chinese e-commerce giant following its big debut.

The stock opened at $92.70 and jumped as high as $99.70 before finishing up 38% at $93.89. Alibaba is valued at $231 billion, higher than either Facebook Inc. and Amazon Inc. and is among the 20 biggest companies by market capitalization in the U.S.

“I don’t know how it could have gone better for them,” WSJ reporter Telis Demos said about Alibaba and its trading debut.

For all that and more, grab a set of headphones and take a listen to MoneyBeat Week. Or catch us on iTunes along with other Journal podcasts in the WSJ What’s News section.

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Categories: Transactions

Train Reading: The Most Important Chart in the World Looks Stale

Wall Street Journal MoneyBeat - Fri, 09/19/2014 - 15:29

News, analysis and some curiosities to ease your commute home.

Relive Day One for Alibaba the publicly traded company – MoneyBeat Live Blog

“Winning, that’s my idea of fun” and other memorable things Larry Ellison said – Digits

A $1 trillion accident waiting to happen – naked capitalism

Will the economy ever be as good again as it was in the ’90s? – New York

Wall Street, drama queen; the week in review – Crossing Wall Street

A musical interlude: John Waite; ChangeYouTube

Kenny G, Mila Kunis, Playboy bunnies, and the myth of the celebrity stock picker – Barry Ritholtz, via BloombergView

Is it time to retire the most important chart in the world? – James Penthokoukis, via AEI

Categories: Transactions

Invasion of the Ultracheap Financial Advisers

Wall Street Journal MoneyBeat - Fri, 09/19/2014 - 15:26
In a world in which the expected long-term return of a stock portfolio after taxes and inflation is 3% to 4% a year at best, financial advisers still typically charge 1% a year for their services.
Categories: Transactions

Jack Ma’s $18 Billion Day

Wall Street Journal MoneyBeat - Fri, 09/19/2014 - 15:08

Jack Ma was all smiles Friday as he made his rounds at the New York Stock Exchange.

And with good reason. As of Thursday, his remaining stake in Alibaba Group Holding Ltd., the company he founded in his Beijing apartment 15 years ago, was worth more than $13 billion, and the 12.75 million shares he sold, a small fraction of the 206.1 million shares he held pre-IPO, had netted him $867 million.

As of Friday afternoon, when Alibaba closed at $93.89, the value of Mr. Ma’s remaining stake in his company had jumped to $18.05 billion.

In an interview with the WSJ in May 2013, Mr. Ma compared an IPO to a wedding. Alibaba, by his account, has already gone through a divorce. In 2007, the company took Alibaba.com, the website that connects buyers and sellers mostly in China, public on the Hong Kong exchange. After launching its IPO to much fanfare, Alibaba.com floundered during the financial crisis, and Alibaba Group ultimately took it private again in 2012.

“We do not want a wedding reception– we want a happy marriage,” he told the WSJ last year, referring to a potential IPO.

The NYSE was more than happy to host Alibaba in its ceremony.

Categories: Transactions

New York Fed Takes Aim at Bank Culture

Wall Street Journal MoneyBeat - Fri, 09/19/2014 - 15:04

Banking regulators have spent much of their post-crisis time focusing on Wall Street balance sheets. Now they’re taking aim at banks’ culture as well.

The Federal Reserve Bank of New York will hold a conference on October 20 on bank ethics and culture, according to people familiar with the event. A group of bankers, regulators and academics will hear speeches by New York Fed President William Dudley and Fed Gov. Daniel Tarullo, the Fed’s regulatory point man in Washington.

New York Fed President William Dudley
Bloomberg News

The closed-door event, which is also set to include appearances by Morgan Stanley Chief Executive James Gorman and Manhattan District Attorney Cyrus Vance, reflects a growing desire by bank supervisors to move beyond quantitative rules targeting banks’ assets and liabilities.

In an interview earlier this week, U.S. Comptroller of the Currency Thomas Curry, who oversees many large U.S. banks along with the Fed, said having proper accountability and controls inside a bank is part of “the first line of defense before you get to capital, liquidity, making sure there’s adequate reserves.”

“You need to have the institution be able to police itself,” Mr. Curry said. The OCC on Sept. 2 formalized that mandate with new “heightened expectations” for the biggest banks that require them to improve risk management and to author and adhere to a written statement about their appetite for risk. The Fed, in this year’s “stress test,” faulted several banks, including Citigroup Inc., over “qualitative” issues, such as failing to adequately monitor risks across all their business lines.

The New York Fed event follows on a speech by Mr. Dudley in November 2013 in which he said stress tests and other regulatory changes “may not solve another important problem evident within some large financial institutions—the apparent lack of respect for law, regulation and the public trust. There is evidence of deep-seated cultural and ethical failures at many large financial institutions.”

The goal of the event is to come up with more specific goals for addressing those failures, a person familiar with the matter said.

Besides the speeches by Fed officials, the event’s agenda includes panels on compensation, enforcement, structural changes to the industry, and “industry-driven change,” the person said.

New York Fed officials including General Counsel Thomas Baxter will moderate panel discussions. Besides Messrs. Gorman and Vance, other participants include former Deutsche Bundesbank President Axel Weber and Richard Lambert of the Banking Standards Review Council, an independent entity set up to promote high standards of behavior at banks in the U.K.

Chief executives at some of the nation’s biggest banks, meanwhile, have been working on their own response to regulators’ concerns about industry culture. Mr. Dudley’s scathing speech last year focused attention on the issue, prompting discussion on what proactive action the industry can take on the topic. Working through the Clearing House, a trade group representing large banks, executives are drafting a set of principles that contribute to a “sustainable and effective” internal culture, including compensation and personnel practices and the role of the chief executive, according to people familiar with the effort. It remains unclear what the group will do with the document.

The industry likely has an eye on heading off more formal action by regulators on ethical concerns. In the U.K., for instance, a broad review of the culture of U.K. banking led to prescriptive recommendations such as tighter curbs on banker pay.

Update: The New York Fed has now posted the full agenda of the conference.

Categories: Transactions

AIG Disperses Wintrob’s Responsibilities Among Four Execs

Wall Street Journal MoneyBeat - Fri, 09/19/2014 - 14:47

American International Group Inc. is losing Jay Wintrob, the long-time head of its life-insurance and retirement-services unit, and it turns out the company is replacing him with four people.

In a news release and memo from new AIG CEO Peter Hancock Thursday after announcing Mr. Wintrob’s departure, AIG unveiled a series of organizational changes to reassign responsibility for products and activities that have been under Mr. Wintrob.

Jay Wintrob
Michal Czerwonka for The Wall Street Journal

Mr. Wintrob’s departure, to “pursue other opportunities,” was announced by the company Thursday afternoon. Mr. Wintrob had been passed over for AIG’s top job in June, in favor of Mr. Hancock, who had run the company’s property-casualty-insurance unit since 2011.

Mr. Hancock’s promotion took effect Sept. 1. He succeeded Robert Benmosche, who retired after a five-year stint that saw the insurer repay the government in full for one of the biggest rescue packages of the financial crisis.  Mr. Wintrob is 57 years old and Mr. Hancock is 56.

Meanwhile, analysts at Sterne Agee Friday morning said the departure of Mr. Wintrob isn’t surprising given he lost out in the succession race, but noted they were “extremely disappointed.” They called it “a significant loss of executive talent,” saying “his contribution to the company was significant, and thus his retention somewhat critical.”

Many investors seem to agree. AIG shares were down 91 cents a share, or 1.6%, in afternoon trading, while the DJIA was basically flat.

Responsibility for consumer-oriented products sold in Mr. Wintrob’s unit—life insurance, annuities and retail mutual funds, among others—is transferring to Kevin Hogan, who oversees a global consumer business that includes home insurance, for instance. Mr. Hogan worked for AIG from 1984 to 2008, then left for a senior job at Zurich Insurance Group before returning to AIG last year.

John Doyle, who runs AIG’s global commercial property-casualty-insurance business, takes responsibility for certain other activities. Those include structured-settlement annuities, which are court-approved income streams to compensate accident victims and other injured people, as well as certain institutional investment offerings.  Mr. Doyle has been with AIG since 1986.

Two other executives, meanwhile, take responsibility for other activities that have been under Mr. Wintrob.

Mr. Wintrob has been with AIG since 1999, when the then-expanding insurer acquired SunAmerica Inc., a financial-services business that Mr. Wintrob had helped build into a major seller of retirement-income products. Under Mr. Wintrob in recent years, the business has been a strong contributor to the company’s profitability despite low interest rates and tough economic conditions. The unit last year contributed just over half of AIG’s pretax operating income from its insurance businesses.

People familiar with the matter said that Mr. Wintrob has said he wouldn’t be joining an AIG rival in his next career move.  He didn’t return a phone call seeking comment.

Categories: Transactions

BitBeat: More Pain For Bitcoin Prices; Are Chinese Miners To Blame?

Wall Street Journal MoneyBeat - Fri, 09/19/2014 - 14:35
Agence France-Presse/Getty Images

Welcome to BitBeat, your daily dose of crypto-current events, written by Paul Vigna and Michael J. Casey.

Bitcoin Latest Price: $395.96, down 6.1% (via CoinDesk)

Crossing Our Desk:

–Bitcoin is getting hammered, marking the culmination of a  rather gloomy summer in the market for the digital currency. After a 7.35% fall on  Thursday, it is now down another 6% since that overnight close and has traded Friday at its lowest level since April, according to Coindesk’s Bitcoin Price Index.

The clearest explanation for this latest collapse is more technical than fundamental: essentially, there’s been an absence of big new buyers over the past three months, which has given sellers an excessive impact on the price. It is now down more than 30% since June 19 and while the decline has been more gradual, it is now running into automated triggers that are exacerbating the slide. Other fundamental explanations are offered up as well, the most interesting theory being that Chinese bitcoin miners are dumping the digital currency for dollars. Some even speculate that they could be doing so to get into the Alibaba IPO.

The first thing to remember is that bitcoin is a “very shallow market,” says Dan Held, a founder of Blockchain’s market analytics unit ZeroBlock. And because bitcoin is global and unregulated,  “anyone anywhere,  even a kid in Bulgaria who mined 10,000 bitcoin two years ago, can mess with that market” by making a few large sales, he says. Mr. Held also notes a perverse negative effect from the ongoing adoption of bitcoin for payments by merchants, most of which immediately swap their incoming bitcoin into dollars.  This doesn’t specifically explain why bitcoin has fallen these past few days; rather it points to a buildup of selling pressure now hitting something of a critical mass.

That trigger effect is likely tied to technical factors. The breach of the $450 level midweek is thought to have triggered selling by investors who’d been treating that price as a key support level. What’s more, with new computerized trading strategies available, along with the ability to trade on margin at bitcoin exchanges such Hong Kong’s BitFinex, there has been clear evidence through the summer of price triggers forcing investors to sell to cover margin calls. More of these would have come with the latest declines.

This all comes against the backdrop of a lack of buyers, which is in turn partly explained by uncertainty over the regulatory environment, with authorities in both the U.S. and Europe weighing new rules for bitcoin.

Still, it is the China theory– and it is only a theory — that is most intriguing, in part because it explains a striking anomaly in the bitcoin system: That the summer-long price fall  has coincided with an explosion in bitcoin mining. Over the same three-month period in which the price dropped from above $600 to below $400, there has been a doubling  in the “hashrate,” a measure  of the network-wide computational power with which bitcoin miners compete to solve a mathematical puzzle and win the right to a fresh issuance of 25 new coins at 10-minute intervals. There’s an arms race going on in bitcoin mining. But that begs the question: why would anyone rush to buy mining rigs and pay for ever-greater electricity consumption when both the proportional share and value of the bitcoins you can earn are plummeting?

The China theory is one of the few that seems to makes sense of those competing trends.

The idea is that some Chinese citizens see bitcoin as a vehicle for bypassing capital controls, which limit them to foreign exchange purchases of more than $50,000 a year. With Chinese bitcoin exchanges scrutinized by officials and with banks barred from servicing them ever since a crackdown in April, yuan-funded investment in mining could be an easier, below-the-radar way to obtain bitcoins and sell them for dollars.

Is this happening? Well, we  know a lot of the new mining equipment is coming online in China, where a large number of new ASIC (application-specific integrated circuit) mining rigs are made. Sources have told us of large mining operations surreptitiously installed by employees of state-owned enterprises (SOEs) in factories that enjoy state-subsidized electricity. In some cases, these people say, the rigs are even charged to the company as “computing equipment.” If the state’s paying for both your equipment and your power bill, the price of bitcoin doesn’t matter so much.

But why now? One argument is that a slowing Chinese economy is driving Chinese investors to seek opportunities in better-performing markets overseas. With government-controlled banks paying deposit rates below inflation, Chinese savers had traditionally put their money in real estate. But for the first time in decades, housing prices are falling, in line with signs of a broader economic slowdown. Note, too, that a recent survey found almost half of all Chinese with a net worth above $1.5 million plan to depart the country in the next five years. Bitcoin allows them to transfer their wealth overseas before they leave.

The other argument is that this is not a bet against China, but a bet on a particular dollar-based exposure to China: the Alibaba IPO. This was a Bitcoin Magazine contributor’s theory and it might be a bit far-fetched because you’d likely have seen those flows earlier than this.

Still, the broader speculation around Chinese SOE-based mining ops is an interesting one rich with irony: it would mean the Chinese government is subsidizing a bitcoin-based workaround of its capital controls. (Michael Casey)

- As regulatory issues take on a greater urgency for bitcoin, the community is responding with both a wider and deeper advocacy effort.

This week, two organizational developments reflect this push. One is the Bitcoin Foundation’s expansion into representation overseas, the other is the launch of the Washington-based Coin Center, a new nonprofit research and public advocacy group for cryptocurrency technologies.

According to an announcement earlier Friday, the Bitcoin Foundation has retained Brussels-based public relations specialist Monica Monaco to represent bitcoin-related interests in the European parliament. The announcement comes with the new European Union parliament forming and in the wake of a warning from the new European Banking Authority that banks should avoid dealing with bitcoin until new EU rules are developed.

The Coin Center will be headed by Jerry Brito, formerly a senior research fellow at George Mason University’s Mercatus Center and prominent scholar of and commentator on cryptocurrency themes. For its board, Mr. Brito has also lined up some prominent people associated with bitcoin, including venture capitalist Marc Andreessen, core bitcoin coder Jeff Garzik, and Stanford University professor Susan Athey. It will start with an annual budget of $1 million with funding from firms including venture capital firms Andreessen Horowitz, Hudson River Trading, Union Square Ventures and RRE Ventures, as well as from bitcoin service companies such as Bitpay, Coinbase, BitGo and Xapo. (Michael Casey)

Contacts: paul.vigna@wsj.com@paulvigna / michael.casey@wsj.com@mikejcasey

Categories: Transactions

Pilot Delays His Flight for Alibaba Debut, Nabs Shares at $94

Wall Street Journal MoneyBeat - Fri, 09/19/2014 - 14:15

Cory Frugé, a commercial airline pilot, first learned of Alibaba Group Holding Ltd. about four years ago when he set out to build a private runway on his property in Iota, La. He needed to buy lighting for the runway and in his search for affordable solar-powered lights he stumbled on Alibaba’s website. He couldn’t believe the low prices on the site, and when he heard the company was going public, he decided he needed to try and purchase some shares.

Cory Frugé 

On Friday morning, the New York Stock Exchange opened, but Alibaba didn’t–as sometimes happens with big IPOs as the firms handling the offering try to find an appropriate opening price.

Mr. Frugé was due to fly a private plane from Lafayette, La., to vacation in Destin, Fla., on Friday morning. But he sat around the Louisiana airport lounge waiting for the stock to open for awhile, until ultimately giving up and taking off before trading began.

Mr. Frugé said he was thankful to have some light rain showers to deal with in the air to distract him from spending the whole flight thinking about the Chinese e-commerce company.

The stock started trading shortly before noon–about 10 minutes before he landed. After landing, but while still in the cockpit, Mr. Frugé said he eagerly checked his phone to see how the stock was performing. He saw a text message from his investment adviser who, as a result of a prior arrangement, had purchased 100 shares for Mr. Frugé at about $94.

“I’d told my adviser that if it opened at $80 I’d pick up 1,000 shares, and said the higher we got to decrease the amount,” he said.

Categories: Transactions

Man Pleads Guilty to Passing Tips in ‘Post-it’ Insider Trading Ring

New York Times DealBook - Fri, 09/19/2014 - 14:06
A former mortgage broker admitted on Friday to being the glue that held together an insider ring that involved sharing information about corporate deals at restaurants and Grand Central Station.
Categories: Transactions

Appeals Court Dismisses Citibank Appeal in Argentina Case

New York Times DealBook - Fri, 09/19/2014 - 13:38
Citigroup's next step is to go back to District Court to argue that the court's order preventing it from paying Argentine bondholders leaves it facing “severe” sanctions from Argentina.
Categories: Transactions

Larry Ellison Keeps a Hand on the Wheel at Oracle

New York Times DealBook - Fri, 09/19/2014 - 13:05
Mr. Ellison's 25 percent stake in the company -- and dual role as chairman and chief technology officer -- ensure he’s far from relinquishing control, Robert Cyran of Reuters Breakingviews writes.
Categories: Transactions

Celebrating Alibaba’s Debut In Hangzhou: ‘It’s Going to Break $100!’

Wall Street Journal MoneyBeat - Fri, 09/19/2014 - 12:37
Former Alibaba employees celebrating the company’s IPO at a small coffee shop in Hangzhou, China.
WSJ

In downtown Hangzhou, a short drive away from where Jack Ma first founded China’s Alibaba Group Holding Ltd., a crowd of former employees celebrated it’s initial public offering at a small coffee shop among a litter of wine glasses and vases of roses.

At 11 p.m. local time — 11 a.m. in New York — the stock had yet to begin trading. The group stared expectantly at the wall, where the owners were projecting a stock ticker website tracking Alibaba’s movements, frozen at the $68 offering price.

Tan Yoyo, who left the company two years ago to start the coffee shop with another former Alibaba friend, served slices of cheese cake as guesses of how high the stock would go flew around the room. The highest guess, at $102 per share, was proffered by a former Alibaba employee now involved in work on a cashier payment system.

“Take my picture,” said former Alibaba employee Tan Yoyo. 
The Wall Street Journal

The lowest guess, at $86, was offered by another former employee working in investment management. The winner, it was agreed, would treat everyone to dinner the following day.

Above the clamor of voices, Ms. Tan — who’d personally guessed $89 — said that she was thinking of immigrating to Australia with her husband and young daughter with her profits.

“They have houses in northern Sydney that are really nice,” she said. “Some by the sea, some with flower gardens in front, beautiful.”

“It’s like a great big countryside,” she said of the country. “I think it’d be a freer environment for my daughter. Her personality might be more respected there. She might be happier.” Still, the amount of stock she has — at a starting price of $68 per share, worth some $680,000 — wouldn’t be enough to buy one of the homes she was aspiring to, she said.

Overhearing, the fellow co-owner of the coffee shop, Emily Wu, also a onetime Alibaba employee, joked that Ms. Tan could start a coffee shop there, or perhaps raise cows.

Just before midnight, someone put on “Vincent (Starry, Starry Night)” by Don McLean. The stock began to jump, to $92.80 and higher. It kept climbing.

More In Alibaba IPO

Voices broke out in a clamor. “It’s starting to trade!”

“It’s above $90!”

The green letters continued to climb upwards. They rose to $95.26 and even higher.

“It’s going to break $100!” someone shouted. (It didn’t.)

The revelers rose and began to snap photos of the wall. “Who knows if we’ll ever see this number again,” one said.

“Take my picture!” Ms. Tan called. She moved swiftly towards the wall and posed, grinning, both hands  flashing a twin victory sign. “Quickly, quickly! Thanks, thank you.”

–Te-Ping Chen contributed to this article. 

Categories: Transactions

British Food Delivery Giant Forms Joint Venture in Brazil

New York Times DealBook - Fri, 09/19/2014 - 11:53
Just Eat, which has been expanding globally, has agreed to merge its Brazil operations with iFood, owned by the mobile company Movile in São Paulo.
Categories: Transactions

Alibaba’s Financial Health Profile Lines Up Well Against Other Tech Companies

Wall Street Journal MoneyBeat - Fri, 09/19/2014 - 11:21

Alibaba, which began trading this morning after its splashy IPO, is not without its issues, but just from a standpoint of financial health, the company compares very favorably to other high-tech companies.

James Gellert, who is CEO of independent ratings agency Rapid Ratings, sat down at the MoneyBeat desk this morning to talk about Alibaba, the stock, and its prospects.

Mr. Gellert’s firm gave Alibaba a 71 on its 0-100 financial health rating scale, indicating the company makes good use of its cash, operates efficiently, and is a low default risk. By comparison, it ranks Facebook at 70, Yahoo at 45, Amazon at 41, and Twitter at 16.

Categories: Transactions

Three Reasons to Avoid Alibaba, One Reason Not to Worry, and a Bonus Red Flag

Wall Street Journal MoneyBeat - Fri, 09/19/2014 - 11:15
Bloomberg News

Alibaba started trading Friday, and it’s easy to get caught up in the excitement of a big IPO, especially prodded by the Street’s best salesmen. But there are good reasons to be wary.

Now, let’s get one thing out of the way up top: The reasons to avoid Alibaba’s stock are not the usual red flags that surround high-tech companies. This is a company that has healthy fundamentals. Rapid Ratings, an independent firm that rates a company’s financial health on a scale of 1 to 100, gives Alibaba a 71, which puts in a group that historically has presented very little default risk. By comparison, it currently rates Facebook at 70, Amazon at 41, Yahoo at 45, and Twitter at 16.

That’s a reason not to worry about your investment. That said, there are other aspects of Alibaba and this IPO that should have investors on guard.

Corporate Governance. This might be the biggest red flag for your average investor. It cannot possibly bolster investor confidence that Alibaba’s ownership structure was labeled “worst in class” by MSCI. The problem is that the way the company is set up, a small sliver of shareholders, which included founder Jack Ma, will have control of the company, no matter that they own only about 13% of the shares outstanding, and no matter whether or not they sell their stakes in the future.

Moreover, investors aren’t actually buying shares in Alibaba, they are buying shares in a shell company through what’s called a “viable interest entity.” Other Chinese firms get around Beijing’s ownership rules by this same route, but investors should understand they “own” Alibaba only through a loophole Beijing chooses to leave open. If the government pulls the rug out from under foreign owners, there’s no recourse.

This isn’t an issue so long as the sun keeps shining on Alibaba. What if things go downhill? It’s not impossible to contemplate, because…

China. Sure, buying Alibaba’s stock is a way for investors to play China, the world’s second biggest market and biggest emerging market. But that could end up being a more risky play than people expect. China’s economic growth has been flagging for years; the double-digit GDP days are long gone. The official growth target these days is 7.5%, but all the latest economic numbers point to a serious slowdown – with the added caveat that official Chinese data is notoriously unreliable. The economy could be even worse off.

Then there’s the Party. For as much as Alibaba may appear to be a success story parallel to other tech companies, this is a massive Chinese company. That means it’s fate is intricately connected to the politburo. Beyond their control of the issue of foreign ownership, the government holds a sword over the company’s Alipay unit. That online payments processor currently controls about 50% of that market. If state banks push back against the upstart, the government could swiftly puts the clamps on Alipay.

Ultimately, Alibaba must court the favor of the Communist Party. CEO Jack Ma is very aware of this risk. He told investors on the IPO roadshow that government relations will be a major focus of his. Mr. Ma and Alibaba seem to be favor right now. Mr. Ma went with President Xi Jinping to South Korea in July (along with other CEOs). If you buy these Alibaba shares, you are betting that favor will continue to shower down upon the company.

Return on investment. The roadshow was very successful in drumming up enthusiasm for the offering. The company priced its shares at $68, and it opened at $92.70. That’s great for the selling shareholders, but for investors it mathematically lowers their returns, at least in the short term. “A higher-than-anticipated price has also reduced expectations for appreciation over the first month of trading,” ConvergEx Group wrote in a note.

Bonus Red Flag. Alibaba shares will not carry a dividend. This is not, of course, unusual. Most stocks these days don’t pay dividends, especially tech stocks. Investors are usually at least mollified by the idea of having an ownership stake. But in this case, as outlined above, investors aren’t getting even that. Which makes you wonder exactly what you are getting for your money, besides the chance to pull the arm on the Street’s latest jackpot machine.

“We believe the IPO is most appropriate for investors with higher risk tolerance,” the analysts at Morningstar concluded, even if the fundamentals look sound.

Categories: Transactions

Putting Soul Back Into Business

New York Times DealBook - Fri, 09/19/2014 - 11:03
A new book offers suggestions on how organizations can reinvent themselves, and a first step is putting trust in employees, Tony Schwartz writes in the Life@Work column.
Categories: Transactions

Apple’s Crowds Draw a Crowd of Guerrilla Marketers

Wall Street Journal MoneyBeat - Fri, 09/19/2014 - 10:42
A team from mobile-gaming company Leo Vegas at the Apple 's iPhone launch on London’s Regent Street.
Simon Zekaria/The Wall Street Journal

At Apple’s flagship London store on Regent Street, a man paraded a 4-foot placard touting a product offering “the latest in apple technology,” complete with technical data such as size and price. Except this was for British apple juice, rather the American technology giant’s newest iPhone.

Drawn to the fervor of the global annual event, companies big and small are piggybacking on the media spotlight at iPhone launches by handing out branded free food and showcasing their own products to the waiting campers and queuers.

On Friday, Innocent Drinks, an English juice maker mainly owned by Coca-Cola , stole eyeballs in London with an advertisement that apes Apple’s marketing format. Marketers from the company also handed out juice bottles to thirsty and weary Apple fans waiting in line.

The poster highlights the bottle’s “innovative open/close mechanism” and “new rounded edges.” It touts the contents as made of “siriously tasty apples”—a reference to Apple’s voice-activated search technology, Siri. The price is given as “under £539,” a tongue-in-cheek reference to the premium prices of Apple’s latest cellular devices. Innocent also placed the ad at the top of its home page.

Innocent tweeted out the ad under the tagline “Finally, it’s here,” and Twitter reaction was positive. “Nice one. How d’you like them apples?” said James McCullagh, who works at British advertising firm Saatchi & Saatchi.

 

Innocent Drinks promoted its ‘iNnocent 330ML’ outside the Apple Store on London’s Regent Street.
Innocent Drinks

Other companies were also eager to steal the limelight amid the bustling atmosphere of Apple’s launch. Asian conglomerate Hutchison Whampoa 's U.K. mobile telecom operator Three handed out bacon wraps, and a group of orange-capped PR representatives from mobile-gaming company Leo Vegas dispensed coffee from backpacks to the thirsty hoards.

At Apple’s Covent Garden store, some companies sent employees to stand in line wearing T-shirts bearing the company logo. Employees from TaskRabbit, a site to find freelance workers for odd jobs, were in line in company T-shirts to buy a few phones for their fellow employees.

And Griffin Technology, a closely held Nashville, Tenn., smartphone-accessory manufacturer, set up a “pop-up press office” where it offered media a place to get breakfast, free Wi-Fi and a “sneak preview” of the company’s Christmas products.

Large companies are sitting up and taking notice of Apple’s media exposure.

Last year, another maker of apple-based products, the Carlsberg cider brand Somersby Cider, rolled out a television advert called “The Somersby Store,” showing consumers excitedly queuing next to crash barriers to sample cider at a store with T-shirted employees, clean benches and docking stations—spoofing Apple’s following by mirroring its retail concept.

And earlier this month, IKEA showcased its new paper catalog for Singapore and Malaysia in a way similar to Apple’s familiar television-spot style.

Some exposure is noncommercial. At Regent Street, the youth-homelessness charity Depaul U.K. offered to sell its spot in the queue for funds.

But does Apple care and, as important, can it do anything about it?

An Apple Store employee at Regent Street declined to speak, as did the company. Innocent Drinks wasn’t immediately available for comment.

Olswang media lawyer Victoria Gaskell said the ability to protect commercial rights depends on how and where the event takes place. While staged events with controlled access offer the primary brand some protection, she said, those in public places are difficult to control.

—Lisa Fleisher contributed to this post.

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