Assignment Questions: The assignment is based on three documents: • A case study

by | Jan 13, 2022 | Finance | 0 comments

Assignment Questions:
The assignment is based on three documents:
• A case study: ‘The Alibaba IPO’
• Alibaba IPO prospectus
• An Excel file containing daily share price of Alibaba for the first three years
after its IPO (BABA share price)
Read the above documents to answer the following questions. You will find the eBook ‘IPOs: The
mechanics and performance of initial public offerings (Arif Khurshed, Harriman House, 2011)
helpful. This book can be accessed from the University of Manchester Library’s website. You can use
external references/material from credible sources (such as the financial press and journal articles):
(i) An IPO marks a strategic milestone for a company.
(a) Explain the benefits and drawbacks of going public.
(b) What may have motivated Alibaba to go public?
(10 marks)
(ii) Alibaba must have had several avenues to raise funds. Why was it relatively easier for Alibaba to
raise capital from the stock markets over debt? Why did Alibaba choose to list on New York Stock
Exchange (NYSE)?
(8 marks)
(iii) On page 71 of the IPO prospectus, Alibaba provides information on the ‘Use of proceeds’. What is
your view on how Alibaba planned to use the capital raised from the IPO? Should Alibaba invest IPO
proceeds in debt instruments or bank deposits?
(10 marks)
Page 2 of 3
(iv) Is it correct to state that Alibaba raised $21.77 billion through its IPO? Why or why not?
(8 marks)
(v) Alibaba used a Variable Interest Entity (VIE) structure to list on NYSE. Alibaba also operates through
an ‘Alibaba partnership’. Explain VIE and Alibaba partnership. How would new investors be affected
by these setups of Alibaba?
(10 marks)
(vi) What are lockup agreements? Describe the lockup agreement of the Alibaba IPO.
(6 marks)
(vii) What is an IPO over-allotment (Greenshoe) option? Describe Alibaba’s over-allotment option. Did
the Alibaba IPO underwriters exercise the over-allotment option?
(6 marks)
(viii) The underwriting investment bank takes on a central role in the IPO process.
(a) What are the key tasks executed by the underwriter?
(b) What are primary considerations when selecting an underwriter?
(c) Often, multiple underwriters are involved. In the case of Alibaba, a syndicate of 35
underwriters was involved in the IPO. What are the main motivations for syndication?
(d) How much compensation was paid to the underwriters of Alibaba? Do you think it is
comparable to the average compensation paid to underwriters in US IPOs?
(e) What do you understand by ‘price-stabilization’ activities conducted by the underwriter(s)?
Do you think the underwriters were involved in price-stabilization of the Alibaba IPO?
(20 marks)
(ix) Without conducting a formal valuation analysis and based on the information given in the case
study, the IPO prospectus and external resources (such as media coverage at the time of the IPO),
discuss the pricing of the Alibaba IPO. Would you have invested in Alibaba at the issue price of $68?
(10 marks)
Page 3 of 3
(x) The diagram below shows the performance of Alibaba shares for the first three years after the IPO
(from September 2014 to September 2017). The first day of public trading of Alibaba shares was 19
September 2014. Shares were sold in the IPO at an offer price of $68. More information on daily share
price movements is available in the Excel file (BABA share price).
Source: Yahoo Finance
Based on a visual examination of the chart above, how does the performance of the Alibaba IPO
compare with average IPO performance documented by past empirical studies
i. in terms of the short-term performance of the Alibaba IPO?
ii. and over the longer term?
Past studies have suggested a number of explanations for short-run underpricing and long-run over
or underperformance of IPOs. Discuss the ones which you think are relevant to Alibaba’s case?
(12 marks)


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