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 That listing would have guaranteed Alibaba inclusion in the Nasdaq
100 Index by the end of the year, and funds which track the index
would have had to buy.
But two sources familiar with the situation said Alibaba executives
worried about Nasdaq's ability to handle their $21 billion initial
public offering later this month, since the exchange botched
Facebook's market debut two years ago.
Nasdaq tried to persuade Alibaba that it had fixed the problem, the
sources said, but it is not clear whether they were swayed.
One of the sources said that Alibaba eventually was satisfied that
Nasdaq had solved the issue and chose NYSE because its overall pitch
was better. The other said Nasdaq executives believed that Alibaba
decided that the possibility of a botched IPO, however small,
outweighed the possible benefits of being in the index.
Alibaba and NYSE declined to comment, while a spokesman for Nasdaq,
which has repeatedly said it has fixed the issues that went wrong in
the Facebook IPO, said "It was a close race, and we wish Alibaba
well."
Alibaba’s misgivings about Nasdaq’s technology, two years after
Facebook’s glitch-ridden, $16 billion market debut, show the
incident continues to threaten Nasdaq's reputation.
Listings contributed only 12 percent of Nasdaq's $1.9 billion in
revenues in 2013, and large listings such as Alibaba’s are less
profitable for exchanges, but within the financial community they
are taken as a barometer of success.
Nasdaq systems buckled under the tremendous volume of orders on the
first day of trading in Facebook’s shares in 2012, leading to hours
of delay.
In its presentation to Alibaba, Nasdaq detailed the steps it had
taken to prevent another Facebook-style glitch, two sources familiar
with the pitch said. The exchange has said it responded to Facebook
by putting extra safeguards in place, creating new positions within
the company to improve communications with the industry and
regulators when errors occur, and establishing an engineering team
to monitor and analyze daily performance.
INDEX FUND BEDROCK
The decision not to go with Nasdaq meant that Alibaba may not join
any major global index this year.
"There is a pretty strong argument that index inclusion equals
stability," Kevin Landis, chief investment officer of Firsthand
Capital Management, a Silicon-Valley-based technology-investing
specialist with $400 million in assets under management.
ETFs and mutual funds that track such benchmarks have to buy and
hold their stock.
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The Nasdaq 100, which includes companies such as Apple and Google,
has a market capitalization of $4.75 trillion. Funds such as the
$46.8 billion QQQ PowerShares exchange-traded fund, the
fifth-biggest ETF in the world, track the Nasdaq 100, according to
data from Thomson Reuters' Lipper service.
If the IPO values the company at $200 billion, Alibaba would have
been about 3.3 percent of the index. There are more than $54 billion
in ETF assets alone linked to the index, which means at least $1.7
billion would have flown into Alibaba shares.
The chance to get on Nasdaq 100 was a selling point for Facebook
itself. In the lead-up to the Facebook IPO, Nasdaq reduced the
amount of time a qualifying firm needs to be listed on Nasdaq in
order to be added in the index to three months from a year.
Alibaba doesn’t qualify to be on many of the world’s major indices,
since it is registered in the Cayman Islands. The behemoth S&P 500
Index, which has a market capitalization of $18.6 trillion, only
lists U.S. companies.
The Chinese firm is not eligible to be part of the biggest MSCI or
FTSE indices for other reasons, although MSCI is looking at changing
its index rules in a way that could put Alibaba on a major index.
And finally, Alibaba gave up a chance for mainland Chinese to
invest, since China-based money manager Guotai Asset Management's
Guotai Nasdaq 100 Index trades on the Shanghai Stock Exchange.
"It falls into this no man’s land of indexing," said Dennis
Hudachek, a senior ETF specialist with ETF.com, an expert on
exchange-traded funds.
(Editing by Paritosh Bansal and Peter Henderson)
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