Institutions to get lion's share of Alibaba spoils

By Liana B. Baker, Jessica Toonkel and Deepa Seetharaman

(Reuters) - Major institutional investors such as BlackRock will likely receive the bulk of roughly $22 billion worth of Alibaba Group Holdings shares being sold in an initial public offering set to price later on Thursday, people familiar with the situation said.

By restricting the allocation so narrowly to large institutions, the underwriters of the IPO hope to prevent volatile trading of the Chinese e-commerce company's shares after expected trading begins Friday and in the weeks to come, the sources said.

Alibaba, which handles more transactions than Amazon.com Inc and eBay Inc combined, is expected to price within a $66 to $68 per American depositary share range, mutual fund company Fidelity said on its website. The final price has not yet been determined.

The sources said banks managing the offering plan to allocate the bulk of the heavily anticipated offering - expected to be one of the world's largest ever - to a group of 25 to 50 large institutions.

Demand from institutions has been strong, with between 35 and 40 orders placed for $1 billion or more in shares, investors briefed on the matter said.

The IPO represents a milestone for the company, which was founded 15 years ago in former English teacher Jack Ma's one-bedroom apartment and which has lured investors with its surging revenue growth and solid profit margins.

Alibaba is responsible for 80 percent of online sales in China and works with a number of businesses there including consumer online marketplace Taobao and payment service Alipay.

An Ipsos poll conducted for Thomson Reuters found that 88 percent of Americans had never heard of the Chinese e-commerce company.

RAPID GROWTH

"For this kind of large deal it’s very common to allocate the bulk of shares to the large institutionals who will hold it for the long run," said Josef Schuster, founder of Chicago-based IPOX Schuster LLC, which helps create index funds for IPOs.

Investors, eager to buy into China's rapid growth and evolving Internet sector, have been clamoring to get shares since top executives at Alibaba, including Ma, kicked off their road show last week.

“It was one of the more impressive IPO presentations,” said Jerry Jordan, manager of the $48 million Jordan Opportunity Fund. “I didn’t realize just quite how successful they are."

Many investors reported difficulty in getting the full allocation of shares they were aiming for.

John Boland, president of Maple Capital Management in Montpelier, Vermont, said he had put in orders for about 5,000 Alibaba shares on behalf of institutions and high net worth individuals and had been told the offer was oversubscribed and that he would probably not get the full order.

“Beating the rush doesn’t count in this game,” Boland said.

Alibaba's revenue surged 46 percent in the April to June quarter on strong gains in its mobile business, with net income attributable to its shareholders nearly tripling to $1.99 billion, or 84 cents a share.

At the top end of its range, the IPO would raise almost $22 billion, but if underwriters exercise an option to sell more shares, as many expect, Alibaba's market debut will top Agricultural Bank of China Ltd's record $22.1 billion listing in 2010.

Given the size of the offering and the interest it has attracted, the company, even after allocating most of the offering to big fund companies and other institutions, may not be able to avoid volatile trading of its shares.

Concerns that an opaque corporate governance structure and Ma's outside investments will stymie minority investors' rights could also end up capping short-term gains.

ROOM FOR A FIRST-DAY "POP"?

“Rarely in history has there been an IPO of this size for a company that we know less about,” Senator Bob Casey, Democrat of Pennsylvania, said in a statement on Wednesday. “I continue to be concerned about the level of transparency from Chinese firms listing in our markets."

In addition, a Reuters analysis found that mega-IPOs have tended to suffer weak performance after their customary first-day price rallies.

Despite the possibility of longer-term turbulence, investors and analysts are betting that there is still room for a substantial first-day jump in the shares.

One investor said the IPO's underwriters, which include Credit Suisse Group AG, Citigroup Inc and Goldman Sachs Group Inc, were hoping for a first day "pop" of 10 percent to 15 percent. In a note Thursday, analysts at Morningstar said the shares are more fairly valued at $90 each.

Other underwriters include Morgan Stanley and JPMorgan Chase & Co, with Rothschild, which does not have underwriting operations, advising Alibaba on the deal.

(Reporting by Liana Baker, Jessica Toonkel and Deepa Seetharaman; Additional reporting by Ross Kerber; Writing by David Gaffen and Christian Plumb; Editing by Bernard Orr and Steve Orlofsky)