Mendoza School of Business

Alibaba Said to Plan Hong Kong-Style Fees for IPO Bankers

Published: April 16, 2014 / Author: Leslie Hu

Alibaba Group Holding Ltd. is planning to award about one-third of the fees for its initial public offering in the form of incentive bonuses to coax better performance from underwriters, people with knowledge of the matter said.

China’s largest e-commerce company plans to pay at least 1.1 percent of the total IPO proceeds in fees, two people said, asking not to be identified discussing private information. Estimates of Alibaba’s valuation suggest the company could raise as much as $18 billion in the sale, making the potential fee pool almost $200 million. While the e-commerce giant is preparing for an IPO in New York, performance incentives are common in Hong Kong and have been used by companies including Agricultural Bank of China Ltd.

In U.S. IPOs most of the fees typically go to one or two firms picked to lead a sale, and the breakdown is agreed to ahead of time. That arrangement reflects the power that bankers hold over companies during the IPO process, according to University of Notre Dame Professor Tim Loughran. It can also leave banks tempted to serve a different client than the company: the fund manager who regularly buys into IPOs and is seeking to pay as little as possible for the stock, he said.

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