At the resplendent China World Hotel in Beijing, scores of cameras snapped as colourful confetti floated down from the ceiling. It was 11 August 2005, and this was the global coming-out party for Alibaba, the Chinese e-commerce upstart. After months of frantic negotiations, US Internet giant Yahoo Inc. had agreed to invest $1 billion in cash and create deeper business ties, in exchange for a 40% stake in Alibaba.
Alibaba’s founder, Jack Ma, thin, energetic and standing just over 5ft tall, was beaming. He gushed that it was China’s Valentine’s Day and this was a beautiful match: “You’d be foolish if you said no.” It was his coming-out party, too; the partnership would pave the way for Alibaba to become an international juggernaut.
For days, Ma was almost giddy about a deal that provided his company with a huge infusion of money and unfettered access to Yahoo’s search technology. He was particularly effusive that eBay Inc. and Meg Whitman, who was then its chief executive officer (CEO), had enticed Yahoo to make a competing offer by bidding so aggressively for Alibaba. “Thank you, Meg Whitman,” Ma joked at the time. “Thank you for making all of this possible.”
But Ma soon started having second thoughts about the partnership. He worried that he had sold the stake too cheaply and given up too much control.
Trying to buy back most, if not all, of Alibaba’s shares, Ma started talks that dragged on for several years. With the relationship souring, Ma transferred ownership of Alibaba’s fast-growing online payment service, Alipay, to an entity that he controlled. He didn’t get the permission of Alibaba’s board. He just went ahead and did it.
While Yahoo complained, Ma seemed to get everything he wanted, eventually. In 2011, he negotiated an agreement giving him and a handful of key lieutenants a majority stake in Alipay, one of the company’s crown jewels. A year later, Ma secured a plan for Yahoo to reduce its stake in Alibaba.
When the Alibaba Group goes public later this month in an offering that could value the company at about $160 billion, investors will have little doubt about who is in control of the company. Ma, 49, is the public face. He is the chief negotiator. He is the top strategist. He is the biggest individual investor, with a 9% stake.
Alibaba, a company started out of Ma’s apartment in 1999, is now a technology colossus worth more than US stalwarts such as eBay and Hewlett-Packard Co. Under his leadership, Alibaba has become not just the dominant force in China’s e-commerce, but also a symbol of the country’s breathtaking economic rise. The company has 250 million active buyers in China, and its orders account for more than 60% of all package deliveries in China.
That success has helped make Jack Ma a kind of celebrity CEO, an executive comfortable hobnobbing with business moguls in Davos, leading tours of his company for China’s political elite and promoting the “Wisdom of Jack Ma” in books and on DVDs. The initial public offering (IPO) could make Ma, already one of China’s richest men, worth more than $15 billion. He has already pledged to give away much of that wealth, which would instantly make him one of the world’s major philanthropists. (Ma and Alibaba declined to comment for this article, citing regulatory restrictions on public statements ahead of an IPO.)
Ma has grown accustomed to doing things his way. He regularly strikes deals with close friends and buys companies in seemingly unrelated industries. At times, it is hard to determine whether an investment is personal or professional, because the boundaries between Ma’s portfolio and Alibaba’s holdings can blur.
Such activities are not always transparent, a potential red flag for new shareholders in a public company. Like many Chinese companies, Alibaba also operates behind a cloak of complicated ownership structures, which may limit dissenting shareholders’ objections.
Rebellious and precocious
Ma grew up in the eastern Chinese city of Hangzhou, the middle of three children born to a pair of performers of pingtan, a traditional musical storytelling technique. Neighbours called him a troublesome and often rebellious young boy, but he may have just been precocious.
At 10, Ma Yun, as he is known in Chinese, took a liking to English and would ride his bicycle to the Hangzhou Hotel to practice with foreign tourists, an experience he said opened his mind to the outside world.
His poor math skills almost prevented him from attending college. But after passing the national college entrance exam on the third try, Ma gained admission to a local teachers’ college, where he excelled and was elected president of the student union. When he graduated in 1988, he took a $14-a-month job teaching English at the Hangzhou Institute of Electronic Engineering and quickly became one of its most popular instructors.
With China’s economy beginning to take flight, Ma saw opportunity in entrepreneurship. In his spare time, friends say, he co-founded a translation agency, sold medicine and dabbled in stocks. “If I’m not a millionaire by the time I’m 35,” he joked with his friend Qi Xiaoning, “please kill me!”
He visited the US for the first time in 1995. Ma had befriended Bill Aho, an American who taught English in Hangzhou, and stayed with Aho’s relatives in Seattle. There, he was introduced to the World Wide Web by Aho’s son-in-law, Stuart Trusty, who ran one of America’s first Internet service providers, VBN.
“At that time, I had an office in the US Bank tower, and Jack came and I showed him what the Internet was,” Trusty says. “Back then, the Internet was largely a directory for governments and businesses, but he seemed excited.”
Ma returned home and set up one of the country’s first Web companies, China Pages, an online directory for domestic businesses looking for customers overseas. Former colleagues say Ma worked tirelessly, knocking on doors, taking photos, collecting information and translating it into English. When done, he mailed the listings to VBN in Seattle to post on the Web.
“At that time, the concept of the Internet was foreign to the Chinese people—people had no idea and no reaction when we introduced them to the idea,” said Yu Xiaohong, one of Ma’s partners at China Pages.
China Pages struggled at first, but Ma was optimistic. During a 1996 trip to Seattle to meet his partners at VBN, he seemed confident he would strike it rich, says Aho, who travelled with him.
“I remember him looking at the expensive houses in the Queen Anne Hill area,” Aho recalls. “He’d point at houses and say, ‘When I get rich, I’m going to buy that house there, and that house...’ And at that time, he didn’t have a nickel.”
Then Ma lost control of his company. In 1996, China Pages was pressured into forming a joint venture with Hangzhou Telecom. The deal put the government firmly in charge.
Discouraged, Ma went to Beijing to work at Infoshare, an Internet advertising agency set up under China’s ministry of commerce. Ma lasted just 14 months at Infoshare. Itching to run his own company, he returned to Hangzhou. “At that time, I felt it was too tiring doing e-commerce in the government,” Ma said in a 2005 interview. “E-commerce should start with private enterprises.”
‘With or without you’
When Ma started Alibaba on 21 February 1999, he asked 17 friends to gather in his second-floor apartment at the Lakeside Gardens in Hangzhou. In the makeshift headquarters, he gave a long talk about his ambitions and how much China needed a great start-up. He picked the name, he later explained, because “everyone knows the story of Alibaba. He’s a young man who is willing to help others”.
The company was built on a similar premise: to help businesses find overseas customers. If a US retailer was looking for a supplier of cotton slippers in China, it might turn to Alibaba.com. If a Chinese producer of buttons wanted to export to South Korea, it could advertise on the site. Alibaba, as he saw it, would be a virtual meeting room for small- and medium-size businesses engaged in global trade.
“I went up to the apartment, where they were all working 24/7,” says Lin, who now teaches at the Chinese University of Hong Kong. “The whole place stank—all those instant noodles. Jack’s ideas were not entirely original—they had been tried in other countries. But he was completely dedicated to making them work in China. I was moved by what I saw.”
A month later, Goldman led a $5 million investment in the company. Soon after, Masayoshi Son, the chairman of Japan’s SoftBank and one of the world’s richest men, agreed to lead a second round of financing worth $20 million. Along with foreign investors, Ma shared a large chunk of the company with his 17 co-founders; most were friends and former students, and also among them was his wife, Cathy.
“This was really unusual, his willingness to share,” says Chauncey Shey, who works for SoftBank and helped make the initial investment. “Most founders aren’t willing to do that, and so that gave us more confidence in him.”
But power was still largely concentrated in Ma’s hands. He and his top deputy, Tsai, held two of the company’s four board seats. Ma also controlled the underlying companies that Alibaba used to operate in China.
China restricts foreign investment in industries considered sensitive, such as the Internet. To avoid running into a problem, Ma set up an offshore holding company in the Cayman Islands. Foreign investors buy shares in the offshore entity and are contractually entitled to the profit. But most of Alibaba’s assets are actually owned by Ma and another co-founder, Simon Xie.
The ownership structure—known as the variable interest entity (VIE)—is common among Chinese Internet companies. But it holds risks for shareholders, because it may leave them without the usual protections.
In June, a US government commission warned Americans about investing in Chinese companies using the complex VIE structure, saying in a report to Congress that “a major risk is that the Chinese shareholder of the VIE will steal the entity, ignoring the legal arrangements on which the system is based”.
Ma often had the final say in strategy. Just as Alibaba was beginning to earn money in 2002, Ma proposed setting up a consumer-oriented site to compete with eBay. Most of his top executives opposed the idea, since eBay was a formidable company and its Chinese partner already had a huge share of the China market.
“Most managers were against it,” says John Wu, who was then the chief technology officer at Alibaba. “I said: ‘We’re barely breaking even. And besides, every business school textbook says focus on what you do best. How can we create a second site?’”
Savio Kwan, who was then Alibaba’s president, remembers a fierce debate one evening at a restaurant in Hangzhou. After Ma prevailed, he telephoned Son of SoftBank.
“He said: ‘Masa, we’re thinking of doing this. We’re going to let you know, but we’re going to do it with or without you,’” Kwan recalls. “Masa called back in five minutes and said, ‘I want in.’”
With financing from SoftBank, Alibaba set up a secret task force to develop the consumer site, which they called Taobao, Chinese for “searching for treasure”. When it was introduced in July 2003, Alibaba used it to wage guerrilla warfare on eBay and its Chinese partner, EachNet. EachNet was more of an auction site and took a commission. Taobao allowed more direct selling and was initially free.
When Ma vowed that it would remain free for years, eBay shot back in a release, “Free is not a business model.” (Taobao now makes money through fees.)
Ma predicted that eBay’s China operation would soon collapse because of pressure to deliver quick profit. He was right.
In China, “eBay really underestimated Jack’s tenacity and Alibaba’s ability to follow through on a strategy”, says Duncan Clark, founder of BDA China, a Beijing-based consulting firm.
With Taobao growing quickly, eBay moved to make a deal, according to people involved in the discussions. In mid-2005, Whitman held secret talks with Ma in China to discuss cooperating with Alibaba or buying Taobao outright. Ma was invited to eBay’s campus in San Jose, California.
But Ma wanted to maintain control and opened talks with Jerry Yang, a co-founder of Yahoo, who was searching for new opportunities in China, according to people involved in the negotiations. The deal was a good fit. Ma received a $1 billion cash infusion to buy out some shareholders and invest. He also had a collection of sites like Yahoo China that he thought would transform Alibaba into a powerhouse.
At the 2005 news conference in the China World Hotel, Yahoo’s chief operating officer, Daniel Rosensweig, leaned over and whispered in Ma’s ear. “Jerry Yang had warned me that whatever you do, don’t let Jack Ma say he acquired Yahoo,” recalled Rosensweig. Ma leaned back and laughed heartily.
The honeymoon didn’t last long.
After Yang resigned as CEO in January 2009, Yahoo’s new management team clashed with Alibaba’s top executives. Yahoo made an Internet search and advertising deal with Microsoft Corp. later that year and stopped providing the technical support to Alibaba that was required under its partnership agreement. It also began competing with Alibaba for advertising in China.
More important, Yahoo rebuffed Alibaba’s request to buy back shares.
“After Jerry Yang left, everything changed,” said David Wei, who until 2011 was one of Alibaba’s top executives. “We had become their most valuable asset and there was no communication.”
The simmering resentments boiled over. Between mid-2009 and early 2011, Ma transferred ownership of his company’s online payment service, Alipay, to a private company he controlled, effectively removing it from the Alibaba Group.
The unilateral move angered Yahoo, which said it was done without board approval. Yahoo also said it had only been informed of the transfer in March 2011, when its accountant had received a letter from Alibaba simply saying the payment service had been “deconsolidated”.
Ma later said that he had informed the board. But Ma said that when the directors had failed to decide, he was forced to transfer ownership of the company to comply with new regulations on online payment services.
“If Alipay were illegal and didn’t get a licence, Taobao would have been paralysed,” Ma told the media in 2011.
After intense negotiations, Yahoo, SoftBank and Alibaba hashed out an agreement, one that seemed to favour Ma. Yahoo and SoftBank—which between them owned 70% of the Alibaba Group—would receive 49% of the profit from Alipay. Ma and a group of unnamed employees would get the rest.
As part of the deal, Ma also won control over a holding company for the financial services affiliates, including Alipay, the main payment processor for Alibaba’s various sites. The holding company, now known as Zhejiang Small and Micro Financial Services Co., has expanded to include wealth management products, small-business lending and China’s biggest money market fund. With its ability to profit from Alibaba’s customers, the group is worth an estimated $25 billion, according to analysts.
“He’s essentially formed a huge company within the company that’s tied into absolutely everything that Alibaba does,” says Fredrik Oqvist, an independent financial analyst in Beijing.
Around the same time, Ma started aggressively making deals with a small circle of businessmen with whom he socialized. The group includes some of China’s most successful entrepreneurs, such as Guo Guangchang of the Fosun Group, a Shanghai-based conglomerate; Shen Guojun of China Yintai Holdings, a retail property developer; and Shi Yuzhu, chairman of the online gaming company Giant Interactive.
Together, they have worked on a web of interconnected deals, both for personal benefit and for corporate profit.
The business group, known as the Zhejiang Gang because many of the members grew up in Zhejiang province, helped Ma set up his private equity (PE) firm, Yunfeng Capital, in 2010. That PE firm has since been a conduit for other Alibaba-related deals. For example, Giant Interactive, run by Shi, bought $50 million worth of Alibaba stock through Yunfeng Capital, according to public filings. Less than three years later, the shares were sold for $200 million.
The businessmen have also formed joint ventures together. Last year, Alibaba started a company called Cainiao with plans to spend $16 billion to build out China’s logistics network. Alibaba owns 48%. Fosun is an investor. Yintai, too. And Shen of Yintai is Cainiao’s executive chairman.
Analysts and corporate ethics experts say there is nothing wrong with such activities. But they caution that regulators may look askance if inter-party deals aren’t properly disclosed.
“Why do they allow Yunfeng to get in on it?” says Jeff Dorr, a Hong Kong-based analyst at J Capital Research, an investment advisory firm. “What value do they bring?”
Most members of the group declined to comment. In an interview, Shen defended such deals, explaining that Ma had formed a circle of trust, something common in Chinese business. Shen insisted that the group follows rules regarding conflicts of interest.
“Public companies have very strict supervision regulations that we have to comply with,” Shen says. “We just cooperate.”
The playbook, with its web of interrelated players and companies, extends more broadly to Alibaba’s aggressive deal-making. In the past year, Alibaba has made acquisitions valued at more than $6 billion, everything from navigation systems and online video sites to a professional soccer team.
The deal structures can be complex. For example, Alibaba said in April that it agreed to lend about $1 billion to Xie, one of Alibaba’s co-founders and a top executive, to acquire 20% of Wasu Media, an Internet TV company. Ma and Shi of Giant Interactive were partners in the deal. The same day Alibaba announced it planned to cooperate with Wasu.
The fast pace of deal-making also makes it more difficult to assess a company properly. This year, Alibaba acquired ChinaVision, a film producer that has since changed its name to Alibaba Pictures. Just weeks ago, Alibaba said it had discovered suspicious accounting at the company.
As Alibaba grows, the company is not shaking up just bricks-and-mortar retailers, but also venturing into state-dominated industries such as media, finance and telecommunications. To help quell any government opposition, friends say, Ma has increasingly cultivated ties to Beijing.
Alibaba, for example, was one of the main sponsors of the Youth Business Council, a state-backed charity set up byGu Liping, the wife of Ling Jihua, at the time an aide to the country’s president who was considered one of China’s most powerful officials. Ma also serves as vice-president of the China Cultural Industry Association, a non-profit that operates under the ministry of culture.
Alibaba has also developed relationships with politically connected investors. When the company paid $7.6 billion to buy back a large number of its shares from Yahoo in May 2012, a big portion was resold to the country’s sovereign wealth fund and two PE firms. One of those firms was Boyu Capital, which was co-founded by Alvin Jiang, the grandson of former president Jiang Zemin. Not long after, New Horizon Capital, a PE firm co-founded by the son of Wen Jiabao, then prime minister, also bought a large block of Alibaba shares, according to corporate records.
Alibaba has also done multiple deals with the Citic Group, one of the country’s biggest state-owned conglomerates. Earlier this year, Alibaba and Ma’s PE firm, Yunfeng Capital, bought a controlling stake in a Citic-backed software and logistics provider, Citic 21cn, for $171 million. After the Alibaba deal was announced, shares of the company rose by as much as 500%.
Analysts say that forging alliances with the government is a vital part of doing business in China. Companies see it as a way to improve their chances of securing approvals and licenses. In a sense, it is insurance against overly aggressive government intervention.
Ma’s decision to list shares overseas in the US was also about maintaining its position.
Alibaba considered listing its shares in Hong Kong. The company asked the Hong Kong Stock Exchange to allow a listing despite rules that permit only one shareholder vote per share; Alibaba has an unusual partnership structure that gives more sway to top executives, including Ma. After Hong Kong regulators refused to make an exception, Alibaba pursued a listing on the New York Stock Exchange, which allows more diverse ownership structures.
When Alibaba goes public this month, investors can decide whether Ma’s tight grip is a selling point or a stumbling block. Yahoo and SoftBank have made their peace, if for no other reason than profit.
Quarter after quarter, year after year, Alibaba has delivered blockbuster growth. And the company, which in 2004 had revenue of about $50 million, may have revenue this year of close to $10 billion.
Said Rosensweig, the former Yahoo executive who was one of the chief negotiators in the 2005 deal: “The story of Alibaba turned out to be a great one.”
©2014/The New York Times