Investment banks should also stand in line between Alibaba and Tencent

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Author Zhou Chaochen
It’s hard to imagine that investment banks, especially Wall Street investment banks, will face standing in line or choosing between Alibaba and Tencent, to be more precise, between Alibaba and Tencent.
The phenomenon of “standing in line” and “choosing one from two” are the beautiful scenery of China’s Internet.
Small and medium-sized sellers play the role of “one of two” between tmall and Taobao of Alibaba and Jingdong and pinduoduo, which are regarded as Tencent department. There are always a few time points each year that will jump out to brush their sense of existence.
A higher profile is the phenomenon of standing in line. In China, basically, whoever invests in it will be labeled “XX series” by the outside world. Although this is a kind of prejudice, it does not rule out that some enterprises enjoy this kind of label.
A group of US users found out that the US group moved Alipay out of the payment options list last Wednesday. The US founder Wang Xing then responded: “what is Taobao’s failure to support WeChat payment? WeChat pays more active users than Alipay, and fees are lower than Alipay’s. Meituan is considered to be a member of Tencent department, and it is not surprising to sit on Tencent’s side.
But this kind of thing happens in investment banks, especially in international investment banks such as Goldman Sachs, Bank of America, JPMorgan Chase and Citigroup, it seems a little strange.
Both Goldman Sachs Group Inc. and Bank of America Corp. will be excluded from the list of investment banks that underwrite ant group’s (formerly ant financial) IPO in Hong Kong because of their past close capital partnerships with Alibaba Group’s rivals, according to a report on Monday, citing people familiar with the matter.
An Alibaba group executive told the investment banks to avoid trading with rivals if they wanted to gain business from Mr. Ma’s vast business empire, the source said.
Ant group has launched a + H share listing plan. The amount raised may break the record of Saudi Aramco’s $29 billion IPO, and its valuation will exceed $200 billion.
Ant group is rumored to have hired Citigroup Inc., JPMorgan Chase & Co., Morgan Stanley and CICC to take charge of its Hong Kong IPO. Ant group has not yet chosen an underwriter for its Shanghai IPO, but international investment banks may be excluded because the lead underwriter of any IPO on the board will have to buy shares in the deal, the person familiar with the matter said.
There is no doubt that investment banks hope to make a fortune in the IPO feast. In 2014, the underwriting Commission of Alibaba’s IPO on the NYSE was $3004 million, accounting for about 1% of its IPO Financing scale.
Investment banks earn commissions by underwriting new shares, which are charged in a fixed proportion of the total financing of new listed companies. In the U.S. market, underwriting fees for large IPOs are usually 3% – 5.5%. But when a company’s IPO amount is particularly large, investment banks will reduce the proportion. Alibaba’s IPO in 2014 is an example, and the underwriting fee ratio is only 1 point.
In an article published by Fortune magazine in 2014, it was analyzed that “the reduction of fees is usually worth the money, which is not only to establish a relationship with enterprises, but also conducive to the future business of investment banks, such as the subsequent issuance of corporate bonds or other large IPOs.” In addition, underwriting fees are not the entire income of investment banks in IPO. “Generally, the income of investment banks in IPO is much higher than underwriting fees, and they even earn more after the IPO. On the day of listing, the share prices of popular companies often soar beyond the offering price; investment banks will sell the new shares in their hands and arbitrage them directly. ”
A Morgan Stanley insider who asked for anonymity told Hu Hu Hu that from the perspective of investment banks, the most direct idea is that the more money they can earn, the better, and it will not distinguish between Tencent and Alibaba. However, from the perspective of enterprises, when IPO, they will prefer investment banks that have always been loyal to them.
In his opinion, what Alibaba cares about is not Tencent, but pinduoduo and Jingdong, which Tencent has invested in, which may also include meituan. Pinduoduo and Jingdong are Alibaba’s most threatening competitors in the field of e-commerce, and meituan is also Alibaba’s strong enemy in the field of local life.
Goldman Sachs and Bank of America have recently teamed up with Alibaba rivals, including selling $7.7 billion in shares for Tencent’s pinduoduo and jd.com in the past two years, helping these companies accumulate capital and compete with Alibaba’s Taobao and tmall in the highly competitive e-commerce field, according to the above-mentioned report. The two banks earned at least $70 million from advising pinduoduo and Jingdong on stock trading, excluding a commission of $1 billion for pinduoduo in September and $4.5 billion for Jingdong’s secondary listing in Hong Kong in June.
Cartography: Zhou Chaochen / Hu olfactory
In a list of Underwriters (some of them are lead underwriters) according to the IPO Prospectuses of tiger smell, Goldman Sachs and Bank of America are the lead underwriters of pinduoduo IPO and Jingdong secondary listing respectively, and they are also listed as the lead underwriters of meituan IPO. As for why Bank of America, Bank of America Merrill Lynch, and Bank of America Securities, the main reason is that in early 2019, Bank of America announced that its investment banking and trading departments would no longer use the name of Merrill Lynch, and that bank of America would combine these businesses into BofA The Securities Division, whose wealth management business is collectively known as Merrill.
As can be seen from the above figure, Credit Suisse, Morgan Stanley and JP Morgan appear almost at the same time in the list of IPO lead underwriters of Alibaba and Tencent companies, indicating that they have excellent balancing skills. Morgan Stanley got only one junior position in pinduoduo’s IPO, with a commission of $6.4 million equivalent to half that of Goldman Sachs, and J.P. Morgan was not involved in the deals.

At the same time, Citigroup, which has participated in each IPO of Alibaba system, has been excluded from the list of main underwriters of Tencent IPO, intentionally or unintentionally.
As for CICC, which helped pinduoduo raise funds in its IPO in 2018, it also appeared on the list of lead underwriters of ant group, mainly because Alibaba is one of the shareholders of CICC. On February 19, 2019, Alibaba announced that it had completed its equity stake in China International Finance Co., Ltd. (3908. HK, “CICC”), holding about 203 million Hong Kong shares of CICC, accounting for 11.74% of its Hong Kong shares and 4.84% of its total issued shares.
“These IPO companies will really mind working with banks that work with their competitors, because they are worried that they will leak information inside your company that has not been disclosed to the public.” “Although there are strict firewalls inside these investment banks, as a businessman, you don’t dare to take the risk,” another anonymous person from a well-known investment bank told Hu
Alibaba, ant group and Tencent have a wide range of investment territory, photo source: Bloomberg
In China’s Internet field (sometimes including the traditional business field), Alibaba and Tencent have a wide range of investment territory. They expand their moat by investing in well-known or potential technology companies, and constantly open up new battlefields. They have penetrated into important areas of the national economy, becoming infrastructure like hydropower and coal, and at the same time, they have formed things In fact, China’s duopoly situation.
This has caused problems for international investment banks, especially those who do not understand Chinese culture and social sophistication. Compared with American or European customers, Chinese customers are more likely to ask the other party to make non competition commitments to show loyalty and ensure that sensitive strategies will not fall into the hands of competitors.
In addition to IPO, investment banks will also help these technology giants or potential giants to loan, finance or issue corporate bonds, which may involve the secrets of the company’s business. Therefore, enterprises will tend to choose those investment banks with long-term cooperation and high loyalty.
In the increasingly competitive Chinese market, investment banks have no choice but to stand in line.