>> live from pier 3 in san francisco, this is "bloomberg west." alibaba has filed for one of the largest ipos in history. the chinese e-commerce giant filed to go public in the united states. the number and price has not been set yet. they have a placeholder but could become bigger than the 16.4 billion dollar facebook ipo nearly two years ago. alibaba had about 83% of the

revenue generated through the chinese e-commerce site. the company is very profitable with net income of $2.9 billion. jack ma will have just under nine percent of the company. yahoo! will have a stake of 22.6% and softbank with 34.4%. joining me is cory johnson and our ipo reporter. you have gone through the f1. what stands out to you? >> with standout is the operating profitability of the company.

the word of warning for those number crunching, it is a fiscal year that ends in march so we do not have full-year numbers because they did not report the number for the full fiscal year. for 2013, we see operating profitability up 25 cents which is spectacular but the numbers are better than that because of a one-time payment to yahoo!. strip that out there and you are looking at a 35% operating margin around about and that's just spectacular. >> how much is coming from the core business? >> most of it. we don't know the breakdown and i will have to crunch numbers to get to that number. this just dropped about an hour a half ago. i'm sure we will be pulling lots of nuggets of information out of this. >> it is comprised of alibaba.com, amazon, ebay, google, paypal.

leslie, what stood out to you? you have been working on this for weeks now. >> i'm looking at the risk factors. we could not get that earlier. i was curious what they would point out and how it compared to other chinese companies that have gone public. they emphasize the role that the government played in their business and how different decisions that the chinese government can make an impact their business to a large extent. one of those is the structure that i'd know we spoke about a few days ago which is essentially a contract between u.s. shareholders and the company that can be dismantled without much warning. then the holdings are virtually worthless.

that is common among internet companies that list in the u.s. other risk factors include the culture. they need to maintain a strong culture. it's a large ecosystem and we got some clues into the massive scale in today's filing as well as the growth. all of those things are really interesting and important than things that investors are also paying attention to. >> they wanted to monetize more global traffic. 90% of their business still comes from desktop, not mobile. >> this is a sale document. they will be forced to reveal things they would not otherwise. they will also be trying to hype this thing like crazy. they're going to play the positive.

>> room to grow. >> they have a lot of people on mobile. 130 million, something like that. there's a ton of people using mobile on a regular basis for these guys. in addition to that, this is just scratching the surface. whether it will get beyond the scratch is another question. >> 136 monthly million -- million monthly active users. >> we have seen some of them go from a desktop business with a fantastic mobile business. most of not been able to make that turn. i guarantee that's one of the selling points of this thing. they could be bigger on mobile. >> they have a convince advertisers that they make their money selling ads to vendors that want their storefront to stand out. i want to bring a few more people into this conversation. the senior west coast correspondent jon erlichman is with us and outlay. from stamford, john malloy, cofounder of bluerun ventures you started investing in china in 2007 opening businesses in beijing and shanghai. i will start with you, jon. what stands out to you in the f1?

any surprises? >> let's start with john malloy. >> numerous surprises. the scale of the business is something we've known about for a long time. your prior commentator, i completely agree with. the outside for them is mobile and it has to do with the transition of the chinese market. they are slightly behind us and mobile adoption so it's normal that kind of customer mix would be in place right now but that is an absolute upside for them. >> jon erlichman, you have been looking at some of the companies alibaba has been buying. walk us through that and how it plays here. >> this is a really important thing and part of the growth story. we are getting into that but you are right. they have made investments in a

variety of well-known consumer related technology companies in the united states from lyft to tango. it is not just the story of marketing to investors. it's the story of marketing to anyone who could potentially be a user of the various alibaba services. i thought it was interesting they use these antidotes like the american farmers who could maybe sell cherries into the chinese market or the small business operators like the yoga studio operator or the cake maker who can buy cake decorations or yoga mats in china using the various alibaba properties. they are very much in a mission to invest in united states and inform people in this country about what alibaba is. >> you helped google set up shop in china. talk a little bit about the regulatory issues. the chinese government comes up a lot in the risk factors. what is your take on the chinese government's power over their business? >> certainly the chinese

government regulates media, commerce, and financial instruments. alibaba was going to get into money market or credit card business which is another question. that's another element. another is the broader risk we have in the back of our minds. can the chinese government dismantle the company without much of the investors ability to do anything? >> can they? >> yes. i have to believe they're trying to build up the economy and established a homegrown company as an international superpower. alibaba has a huge, long running business.

>> john malloy, you have been looking at these companies and setting up business in china for so long. i wonder if this is the company that has been blessed to do things that other chinese companies will not decide to do. they decide it will be alibaba and the changes the competitive structure of the company. >> that's a great question. i do not think the government will pick a winner that overtly but they have to be very comfortable with you to be successful. jack ma is a very dynamic leader who is well-respected. his success is something that the chinese government very much look forward to and is supportive of. he's a very prudent man. he knows how to not navigate the shoals of issues in china very well.

i think this is a red herring. we've been investing there since 2002. vie structure is something we are very comfortable with. this is aligned with the success of the ipo and what the government wants to see. >> john malloy, crid yu, jon erlichman, leslie picker. we will continue this conversation and we will talk about the valuation. some are saying it could reach 250 billion dollars. is that fair? ♪

>> i'm emily chang and this is "bloomberg west." we are talking about alibaba diving through the f1 filing and what could become the biggest ipo ever in the united states. my partner cory johnson is here and jon erlichman, senior correspondent in l.a. i'm joined by john malloy of blue run ventures. and crid yu.

i have seen potential valuations ranging all the way up to $250 billion. is that fair? >> all the bets that alibaba has made in mobile and the other things we have been speculating for a long time about how alibaba will do much more in cross-border trade. the example about the yoga teacher buying directly from merchants. it feels like alibaba is leaving out its largest growth area for subsequent room to grow, additional value. >> interesting. we do know that this is only a first step, but maybe that's the question. what's been left out of the filing?

is that more important to question? >> first-quarter earnings are on many investors minds. one person said march can be a down quarter because of the lunar new year. there tends to be less e-commerce shopping so that tends to be a sign of how less resilient they can be. we saw the results of a strong financial corder for them so it will be interesting to see what they say about 2014 so far. we are also looking to see who is selling and how much. we know yahoo! is selling. we don't know what scented break down and how much they are selling as well as how much softbank is selling. they will maintain more than a 30% stake. are they selling any shares in this ipo? that's yet to be determined. >> i wonder from your standpoint, john malloy, aac a reaction to this deal that has been proposed for a while in terms of other investments?

people are saying they want to buy the type of thing or comparisons along those lines? >> besides mobile, the next growth area is definitely the u.s. where it is they will be expanding particularly in silicon valley. there is no question from an entrepreneur and investor standpoint that there is excitement about the ipo. i would not put it on par of the facebook ipo, but it has that feel.

this is the emergence of another tech titan who will be moving very aggressively. >> i want to talk a little bit more about the role of yahoo! in this filing. crid mentioned it is a tale of two companies. they asked the head of human resources at yahoo! to be on the board and they will sell close to half of their state. what does all of this mean? >> it's an incredible story for the investment of $1 billion for a 40% stake. you just highlighted what they are worth. we would be having such a dramatically different

conversation about the business of yahoo!, the future, if they did not have this windfall coming to it. certainly, in some ways, they are working together thinking about the future of ali baba. we talked about some of the investments that alibaba is making when there was this first push. there was this believe that maybe they would work a little more closely and maybe that has not worked out as planned but you're talking about two companies that both want to capitalize on everything going on from mobile the video. >> in terms of risk factors, this may sound like such a broad question, but what are the risks of this company being in china? are there particular risks? >> censorship was not mentioned anywhere. >> they are largely getting into video and they bought a hong kong video and television producer. if you believe the major business where they have penetrated, then they need to penetrate the next tier cities. china is still very much a developing country. the other is government that there is also business risk. alibaba has a relatively weak position in mobile and they have a huge a smart phone market in the world. there are companies in china but are ahead in mobile. >> it looks like 15% of the gross merchandise volume, we don't know how profitable it is, happened already on mobile. in brooklyn, as we say, it's not for nothing. >> they have 400 million mobile active users versus alibaba and

they have been making tentative moves. a lot of people are anticipating a showdown of sorts. they acquired or took a stake in the second hardest, much quieter, chinese e-commerce retailer and they have started to offer services and goods on the platform. >> and want to talk about how alibaba fits into the broader tech landscape after this next break.

welcome back to "bloomberg west." i'm emily chang. alibaba filing for what could be the biggest u.s. ipo ever ran we

are digging into all the numbers that the chinese e-commerce giant published today. we have crid yu, john malloy, leslie picker, jon erlichman, and cory johnson. john malloy, i will start with you. given all of the investment you do, how do you see them fitting in the landscape? they have been buying up companies of but you have giants out there that actually want to do everything. >> there are two parts to it. china is a very competitive market. if you are successful in a startup, you will have many, many copycat companies after you very quickly. jack ma emerged from that and build a very successful company. now you have the stratosphere competition.

he is used to great competition and on top of that, he is now moving to the united states and he is going to compete with small companies like amazon and ebay. this is a company born of competition and they are extremely quick footed in the way they attack the market. he thinks very strategically. he's a formidable competitor. >> he's taken a long time to take a public for the second time. he took the same company public in 2007 and the stock reform -- performed very poorly. then he bought it back for the price he took it public. i've never seen anything like it. why the desire for the u.s. market out all? it's a profitable company. is there something about these big entrepreneurs in china that they want to conquer the world?

>> it has to be two things that all entrepreneurs have. one is growth. two is ambition. many u.s. companies have tried to take china. these are the two largest mobile digital markets in the world. you have to think about one or the other so that makes a lot of sense. most u.s. companies have suffered in china and they have not been successful. it would be quite a coup if he could bring a chinese company to be successful in the u.s.. >> what about the idea of alibaba buying yahoo!. it's not out of the question. >> those of us that follow the companies have joked about it. a lot of the value is attributive to alibaba. what's arguably all. -- >> arguably all. the valuation puts yahoo! at zero. >> yahoo! has been buying a ton of companies. let's not forget that, smaller

acquisitions mostly mobile. alibaba is weak on mobile. yahoos monthly mobile users have been increasing see you could string together at plausible story that it is a great strategic partnership. >> leslie, are you hearing ideas about alibaba potentially buying yahoo!? >> one thing we reported was their desire to potentially buy back a stake to increase their valuation. looking at the strategic acquisitions, they have made many of them prior to today's prospectus a way that could increase their value when the

prospectus came out in several months from now when the prices start trading in the exchange, something investors will pay very close attention to. >> leslie picker, crid yu, john malloy, jon erlichman. we will talk little bit more about jack ma. who is he? how did he start the company? what investors think about it? ♪

>> you are watching "bloomberg west," where we cover business technology. top story this hour, alibaba, the chinese e-commerce giant, filing for its ipo this afternoon. who is the founder and executive chairman, jack ma? what is his stake in today's filing? hans joins us on the phone and he invested in a lot of chinese companies. and the director of research at forrester and an expert on the globalization of e-commerce and

other digital businesses. i want to start with you. you know a lot more about jack ma than the average person. what is he like? we know he's a colorful guy and he's a celebrity in china. >> jack is extremely strategic. the man had incredible vision 15 years ago when he started alibaba. he wanted to connect suppliers and buyers around the world in an exchange that would be easier. the same year that ggv made an investment then, we have seen alibaba just taking off and it has become the largest e-commerce marketplace in the world during more transactions than ebay and amazon combined. he had that vision way back then that he was going to be building something that was going to be huge and influential, impact people's lives. and he did it.

>> how would you compare jack ma to the other titans like robin li? >> they often compare the four love them. they often joked that jack knows the least about technology but is the most strategic.

robin happens to be sitting in the best unique place, the most strategic asset and tony is the most unassuming yet the rest of building a great product. >> fundamentally, what's the biggest difference between e-commerce and china than in the u.s.? >> there are a few differences. the first is the sheer market size which is already larger than the e-commerce market in the u.s. and growing faster than we've ever seen. how consumers shop online is different there. it is incredibly concentrated. it is very much dominated by them and they control almost half the market today. it is a way that no single site in the u.s. controls the market here. >> crawford is just joining us. talk to us about how you see ali baba in the context of the broader technology industry. we mentioned it is like a combination of amazon, ebay, like with google mixed in. what do you think? >> it's a fascinating company. they also have a pretty significant moat around them. they have very high gross margins -- i'm sorry, offer -- operating margins. they have access to china without taking the inventory. they tend to operate more like a broker. that makes it a very scalable, attractive model. imagine if amazon did not have to take inventory and also got a significant piece of all of those payments. it's a nice elixir of the payment models with access to china that no one else really has. >> there is something about the access that gives them something that lets them have those great operating margins and keep them? >> the fact that they don't own the inventory means that a number of grants have not hesitated.

they have not been reluctant to launch storefronts on the site in a way that they might if they felt that they were competing with the online retail business. there are huge opportunities for brands to turn to them. they have an unprecedented audience in the chinese market today and they can access that market in a way they could not in their own direct to consumer website. >> hans, you know so well how they relate to each other. what do you think the biggest challenges in the numbers we've seen today? >> they have built an amazing business and mobile and they are the most popular mobile app in china today. over chinese new year, red envelopes were sent in the span of two days. that alone puts a scare in what jack and alibaba are doing. that is why you can feel the last six months, they have been extremely aggressive in making acquisitions and investments both in the u.s. and in china. >> how much does this investment matter? it seems to be their social play. >> i have a lot of respect and it's a very good investment with

the number two mobile app in china. regardless of how popular wechat is, they have harnessed to great

media to see what is latest in the chinese landscape today. it is a strategic asset and there will be more e-commerce down the road but it will remain the number one mobile lab and the most popular in china.

>> literally, every time of the camera goes away, i have 57% net income margins for this company. that's crazy. >> it's a profit machine. when you net out some of the payments they've had to make, they are generating a free cash flow. i think the biggest challenge they will have is communicating to the western world what they are. they are in mash-up of so many business models that we have not seen them together what makes it so profitable and it just does not exist in other places.

>> crawford del prete, hans tung, and zia daniell wigder. how they spun it off without talking to yahoo! or softbank. that discussion is next. ♪

>> i'm emily chang and this is "bloomberg west." now that alibaba has filed, what's next? how does it measure up when you pitted against other tech giants like apple, google, and facebook? cory johnson is still with me as well as hans tung, crawford del prete on skype from boston and zia daniell wigder. this is basically the paypal of china that he started under alibaba and he decided to spin it off without talking to

softbank or yahoo!. it is still not part of them ended dramatically changed the value of the group. >> it may have dramatically added risks to alibaba. the notion the way that they look at the responsibility to shareholders, they are already once removed because it is a chinese company that cannot fundamentally be owned by u.s. investors. add to that, the ceo of the company, possibly the board, we don't know, just decided to take this massive asset and give it to someone else with no recourse

to u.s. shareholders. they kind of undid that and now they only pay part of the offering. there's nothing to suggest they cannot do it again. that precedent, something they tried to do a year-and-a-half ago. >> they cite the heavy reliance on alipay. can jack ma be trusted? who's to say he will not do it again? >> back in 2005 when yahoo! made the investment, jack was expect more from yahoo!. there was no support from yahoo! and essentially delivering the valuation equal to yahoo!'s stake in ali baba. i'm not making an excuse but they do not want to take the risk and not get the license they need to operate in china from the chinese government. they kind of use that as kind of an excuse to do that year-and-a-half go. i think the backlash that has been created is tough and taught management a very good lesson.

given how smart they are, i don't think they will do it again. >> zia, one thing we are wrestling with is how to define this company. is it say it is the paypal of china -- is it fair to say? >> it is different in that it is an escrow based service. you can wait until you actually received the product to pay him the funds are not released to the seller until you guaranteed it has arrived safely and you are satisfied.

there are a handful of other ways in which it differs but it serves a similar process that paypal would on ebay here today. >> crawford, how much does this idea of how much we can trust jack ma, the alibaba team, how does this play into your assessment of this company's potential? >> from my standpoint, i don't think trust is the right word. this is a company that has grown substantially and is doing business with many western brands. it's more about clarity, understanding the rules, understanding what's possible. i will be the biggest challenge. how do you communicate with the rules are here versus what they are when you invest in a company in the united states or one that's in europe. that will be a big challenges. tell me what the rules are and we will play by them. communicating this on a broad scale is a huge challenge and it will loom large when people think about the behaviors that have happened in the past. >> hans, he's the executive chairman but he is no longer ceo, how do you expect alibaba to provide that kind of clarity to investors on a regular basis?

>> it is bigger than just jack ma himself. he is the visionary but the ceo has been great in the cfo and now the vice chairman. i see him in the valley a lot. these guys are media savvy. they have had extensive discussions and they know what

investors are looking for. this is a very savvy group. i expect it to be decently transparent, none more so than others. i expect it to be quite good with the investor rep dates moving forward. >> we've been talking about the increasing foothold a are taking in the united states. they have hired this guy from liberty media to run the san francisco office. what is their play in the united states? what does jack ma want to do here, hans? >> they want to help chinese suppliers sell into the u.s.. they have an office that they are being extremely secretive about.

they do not tell people how many employees they have. from the in notes we can gather, it will be a very sizable team. they will want to make sure there are lots of users in the u.s. who have not had a chance to buy all of this stuff from china. they roughly have 80,000 sku's. they have over 8 million suppliers, more sku's than any store can carry. there's going to be a lot of stuff that you just cannot find an amazon or walmart. >> about 8% of the chinese public is using online commerce. the suggestion is that it leaves 92% to adopt to alibaba. i wonder if this is not more of a luxury focused brand and that is the real opportunity here. >> they had a hard time penetrating the luxury there. in large part, midmarket and a few higher-end brands on the site that they scored a big win when they got burberry to launch a store front. they do have a proposition for luxury brands.

it's important for them to see how they can make inroads for them to expand the portfolio of sellers on the site today. >> crawford, looking ahead, we are hearing that they are not going to go public immediately. it will be a matter of months before we see this. what will you be watching for in the march up to the actual offering? >> we will be putting a lot of data together here in terms of understanding the complexion of the business. being able to continue to show revenue growth and continue to show expansion of free cash flow, cash reserves, any comments about how they want to deploy that cash in the united states and other markets will be very important to look at. the comments that were made earlier, we would expect this company -- this is chapter one. they are going to want to expand in western markets probably at a rapid rate.

having a war chest to do that will be very important. >> crawford, last question. alipay will be controlled by jack maw. he has -- jack ma, he has majority control. yes or no, will they care about the corporate governance issues? >> i think they are. those the type of questions that will get asked on road shows and asked in the media. that's a big, big question. is that the kind of thing people should be concerned about? it probably is. that is in the risk. it's a real concern. those of the types of issues that will,. >> crawforddel prete.

hans tung from ggv. and zia daniell wigder from forrester. we will be back after this quick break. ♪

>> welcome back to "bloomberg west." i'm emily chang. it's time now for the bwest byte. let me guess. it's about alibaba. >> your so smart. 18% is the number today. 16 of the 89 offices are outside of mainland china, or 18%. this f1 document is fundamentally a marketing document. they have made no mistake about it. they are selling stock. they are putting weighs in here to try to sell stock. other things required are the risks and so on.

they will do everything possible to suggest that they could be a much bigger company than they are today. >> as i mentioned before, we are hearing this could happen over a matter of months but the markets are going crazy. twitter ended the day down 18% after the lockup expired. how do you expect ali baba to fair and these market conditions? >> a lot of reasons to sell, only one reason to buy. who knows all the reasons of the insiders decided to sell today. it's reasonable to suggest a lot of insiders could not wait for the chance to get out of the shares they accumulated. this market is not just straight up into the right anymore for technology and that may be signs of a healthier market in general but tougher for alibaba to sell this thing. sell inmate, go away. it may end this deal will probably come out sometime this summer.

we will see how big they can get it. -- sell in may and go away. >> they applied for 1700 international patents. what does this say? >> on one level, compared to twitter with probably just one patent, they have a lot more, but the quality is all that really matters here and there is no suggestion that these are great patents, just the suggestion that their are a lot of them. >> they are also applying for patterns in the united states. >> a have not been as big a deal as they have been for mobile. >> it all compares to the u.s. tech giants, the apple, google, facebook, amazon. is it in the same league? >> as the only way to make sense of it. the numbers are also how we make sense of it looking at the numbers and the profitability. these percentages are spectacular. >> think you're watching the special show about alibaba. we will have a lot more on the early edition of "west"

tomorrow. ♪

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