NEW YORK (Reuters) - When Alibaba Group Holding Ltd begins trading on Friday the shares may not be able to avoid the kind of volatility typically seen in trading of eagerly anticipated IPOs, even as the bulk of the shares sold are expected to reside with 25 to 50 behemoth institutions.
Underwriters hope that allocating the majority of the Chinese e-commerce company’s shares to institutional investors, thought of as being less likely than their retail counterparts to sell quickly, may prevent Alibaba from seeing volatile trading associated with IPOs like Twitter and others.
The company is expected to sell about $22 billion in shares after the close of trading Thursday in what is expected to be one of the biggest IPOs in history.
“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.
Yet the line of fund managers who look set to dominate Alibaba’s IPO does not guarantee investors will hang onto their shares for very long, especially if they do not get what they want out of the allocation, people watching the IPO said.
“The biggest pitfall is to ensure that the allocations stick,” said one event-driven investor, who put in an order of shares, but did not want to be named.
Another complicating factor for Alibaba is that in addition to the 320 million shares being offered, there is an additional 128.4 million in shares - about 5 percent of overall outstanding shares - that are not subject to lock-up agreements that restrict insider sales shortly after an IPO, according to company filings.
That’s unusual, and could add some additional selling pressure and increases the incentive for the company to make sure the long-term holders intend to keep their allocation.
“If I am Alibaba and am loading up the top 10 shareholders, I have to be confident that the majority of this top 10 want to own the stock and will not exit out of the stock if it goes up 10 to 15 percent,” the investor said.
In fact, that is the plan at least one fund manager who has put in for pre-IPO allocations has in mind: to sell shares of Alibaba if the stock jumps past its offer price and opens at $90.
“I think fair value is between $90-$100,” said the manager, who wished to remain anonymous because he does not want his trading strategy public.
Analysts at fund research company Morningstar in Chicago said that the company’s expected IPO range of $66 to $68 a share was “conservative,” and that they believe the fair value of the shares was closer to $90 apiece. That would value the company at somewhere around $223 billion, making it more valuable than all but about a dozen companies traded in the United States.
But the stock’s price is not the only factor that could drive selling on Friday. Institutions may also jump ship early on if they do not get as many shares as they had hoped for in the initial allocation.
Jay Ritter, an IPO expert and finance professor at the University of Florida, said individuals receiving allocations of a new public offering tend to hold the shares, contrary to the popular view of fickle retail investors. For institutions, that is true “approximately 0 percent of the time,” he said.
Typically, institutions receive far less than what they request for a new stock offering. In those situations, the fund managers will either buy more to garner what they want, or sell outright, he said.
“What we find with almost all institutions is when they receive shares in an IPO, they either sell all of them or they buy more to get up to their holding target.”
Reporting By Akane Otani; Editing by Bernard Orr