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As IPO nears, Alibaba prepares employees for $40 billion windfall

By Elzio Barreto

HONG KONG (Reuters) - As Alibaba prepares for what could be the biggest tech company IPO to date, the Chinese e-commerce giant has been counseling employees on how to deal with the roughly $41 billion they could unlock through a New York listing.

While some staffers have enquired if premium brand BMW sells cars in Alibaba's corporate orange, others may invest windfall stock gains in property in North America or channel funds back into start-up ventures in China, hoping to build future Alibabas, bankers and financial planners say.

The company, though, has been preparing employees for years on how to manage the avalanche of cash, warning them not to be carried away and splurge on material goods.

While Alibaba Group Holding Ltd's co-founders Jack Ma and Joseph Tsai are already billionaires, many more paper millionaires could be minted once employees are free to sell shares some time after the IPO.

Current and former Alibaba employees hold 26.7 percent of the company, having built up their holdings through stock options and other incentives awarded since 1999, according to securities filings, though these didn't detail the number of employee shareholders.

The IPO windfall - Alibaba could be worth $152 billion, according to the average from a Reuters survey of 25 analysts - will be larger than anything China has seen because of the depth of the group's employee ownership and the size of the company.

Not just managers, but software engineers and staff from sales and marketing and related companies such as Alipay also stand to benefit from selling shares after the IPO.

Some of the 20,000 employees have already had the opportunity to sell part of their stakes during previous Alibaba structured share sales through so called liquidity programs.

"The thinking was that if sudden wealth is like venom, giving small doses every now and then was a bit like anti-venom because your company isn't thrown into chaos," said a person familiar with Alibaba's incentive plans who was not authorized to speak publicly on the matter.

MOVING ON

In its IPO prospectus, Alibaba acknowledged its concerns about employee shareholders coming into new-found wealth, and maybe wanting to move on.

"It may be difficult for us to continue to retain and motivate these employees, and this wealth could affect their decisions about whether or not they remain with us," it said.

Over recent years, Alibaba executives have discussed with employees how the windfall gains could change their lives, warning them not to splash it all on "glitzy things", said people familiar with those discussions.

Former Chief Operating Officer Savio Kwan was one of the executives who took part in the talks, the people said, along with external speakers and academics brought in to talk about leadership, personal development and business goals.

"One thing Jack (Ma) and Savio did was from the early days prepare employees for the effects of having wealth," said Porter Erisman, a former Alibaba vice president and director of "Crocodile in the Yangtze," a documentary about Alibaba's first decade.

"I remember Savio giving a speech about what money means, and he encouraged people to think of money as something that offered more choices. Those choices don't have to be material goods," he added.

Alibaba declined to comment for this article.

HOW TO SPEND IT

As happened after Facebook Inc's IPO in 2012, the new Alibaba millionaires are seen driving up demand for luxury cars and apartments, giving a boost to the economy of China's eastern city of Hangzhou, where the company is based.

Facebook millionaires spent some of their cash booking a trip with a private space tourism company and on an exploration of ancient Mayan ruins in Central America, while some Google Inc shareholders cashed in during the internet firm's IPO to travel around the world, start a documentary film business and open a health-conscious cafe, media reported at the time.

BMW dealerships in Hangzhou have fielded enquiries from Alibaba employees asking if they have models in orange, Reuters Insider television has reported.

But the Chinese government's austerity campaign is likely to keep a lid on too much ostentatious spending, and because the stock listing will be in the United States most of the money employees receive from eventual stake sales would likely be kept offshore rather than flow back to Alibaba's Chinese base.

"Check real estate in Vancouver, not so much Ferraris and real estate in China," said a person closely involved with the IPO who was not authorized to speak publicly on the issue.

Investment bankers and financial consultants predicted that much of the IPO windfall that does return to China would likely go into new technology ventures.

Hangzhou is in a part of China already known as a hotbed for entrepreneurship. As of last year, the city had more than 560 multi-millionaires and in a decade is expected to rival Los Angeles in the number of so-called ultra high net worth individuals, according to property consultant Knight Frank.

"There aren't many cases in China where a private company scales from an apartment to more than 20,000 people like that," said another person with direct knowledge of the IPO process. "More than anything, the impact might be in start-ups, with people coming out with money who have been through this and learned."

LOCKED-UP

Much of the Alibaba wealth is in the hands of Ma, Tsai and a group of senior executives who make up the so-called Alibaba Partnership.

These 28 people - 22 from Alibaba and 6 from related companies and affiliates - own a combined 14 percent of Alibaba, according to the company's filing with the U.S. Securities and Exchange Commission - worth over $21 billion.

The filing doesn't detail the holdings of top executives such as CEO Jonathan Lu, Chief Financial Officer Maggie Wu, Chief Operating Officer Daniel Zhang, Chief Technology Officer Jian Wan and General Counsel Timothy Steinert. Those five, who with Ma and Tsai are among the 28 partners, appear only as owning less than 1 percent of Alibaba.

The IPO will provide employees their biggest opportunity yet to cash out of their vested stocks once share lock-ups expire.

The largest previous sell-down was in 2011 when employees sold about $2 billion worth of stakes to investors including private equity firms DST Global and Silver Lake [SILAK.UL], according to a statement from those firms and the IPO filing.

Ma sold $162 million worth of shares that year, while Tsai raised $108 million from selling part of his stake.

In the same year, CEO Lu raised $37.7 million, CFO Wu sold $4.99 million worth of shares, and former COO Kwan sold a stake worth $40.5 million. Sabrina Peng, an early Alibaba employee and former vice president of its business department, raised $4.6 million in the 2011 sell-down.

Alibaba's biggest single shareholder, with a 34.4 percent stake, is Japanese telecoms firm SoftBank Corp <9984.T>, followed by U.S. internet group Yahoo Inc , with 22.6 percent. Other large shareholders include Silver Lake, DST Global and Singapore state investor Temasek [TEM.UL].

Employees will not be able to cash out of their holdings entirely through the IPO, as most employee stock is likely to be locked up for months, maybe years, people familiar with the listing process said.

When Alibaba listed its Alibaba.com business-to-business unit in 2007, it was six months before stockholders could sell 40 percent of the shares held in an employee equity exchange program. For the remaining 60 percent, the lock-up was for one year.

(Additional reporting by Paul Carsten in Beijing; Editing by Denny Thomas and Ian Geoghegan)

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