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Advising Chinese e-commerce giant Alibaba Group Holding Ltd. on its upcoming initial public offering, expected to be the world’s largest since Facebook Inc.’s $16 billion debut in 2012, is unquestionably one of the most coveted assignments of the coming year. It was a feather in the cap of Simpson Thacher & Bartlett when it landed the role of issuer’s counsel.
But the competition was less than one might think. That’s because Alibaba has let it be known that it won’t be hiring any firm for transactional work that also handles significant deals for Chinese competitors like Tencent Holdings Ltd., Baidu Inc. or JD.com. That ruled out from IPO consideration a number of top firms that might otherwise have been in the running, including Skadden, Arps, Slate, Meagher & Flom and Davis Polk & Wardwell. But Alibaba’s restriction also applies to smaller deals and smaller firms.
“We represent one of Alibaba’s competitors,” says a Beijing partner with a midsize U.S. firm who, like all of the lawyers who agreed to speak to The Asian Lawyer for this article, requested anonymity based on the sensitivity of the subject. “When we approached them, they told us, if they were to select us for their panel, we had to drop our other client. We couldn’t accept that term.”
Alibaba declined to comment for this article.
International law firms are accustomed to dealing with similar so-called business conflicts elsewhere in the world, not least in the U.S. tech sector. But such demands from clients are relatively novel in China, and lawyers say firms face a more complicated choice in the supercompetitive but still-developing market.
“It’s a business judgment call for law firms,” says a Hong Kong partner with a California firm. “You have to decide which [client] you are willing to lose.”
But some firms did not get to make the call themselves. Past experience alone has been enough for Alibaba to rule them out. A Beijing partner with one U.S. firm says his firm was told it wouldn’t be considered by Hangzhou-based Alibaba because it had previously represented competing companies in significant but, in his view, irrelevant matters.
“We would have liked the chance to make a decision, weighing the pros and cons,” he says. “We might have decided [Alibaba] was worth it.”
Lawyers say Alibaba’s demands reflect the intense competition among major Chinese Internet companies. The three largest–Alibaba, Tencent and Baidu–are all trying to expand their offerings to reach users across mobile devices and social media. Tencent and Alibaba in particular have been vying with each other to build platforms integrating online shopping, mobile messaging and Web-based service ratings with physical stores and logistics facilities. Alibaba operates two of China’s top three shopping websites, but it lacks Shenzhen-based Tencent’s social networking reach, lately bolstered by the popularity of its WhatsApp-like mobile messaging app WeChat, which now has a 350 million users.
Tencent has tried to leverage WeChat’s popularity onto Alibaba’s e-commerce turf by taking a 15 percent stake in JD.com, China’s second-largest online retailer after Alibaba, and integrating the latter’s offerings into its messaging platform. Meanwhile, Alibaba has tried to take on WeChat with its investments in messaging developer TangoMe Inc. and microblogging service Weibo. It has also made acquisitions or investments in a variety of other online services, and has launched its own personal finance, taxi booking and online gaming offerings.
Such is the environment in which Alibaba is asking firms to take sides. Freshfields Bruckhaus Deringer, which, in less restrictive times two years ago, handled a $600 million bond issue for Tencent, is now firmly in the Alibaba camp. The British Magic Circle firm, which advised Alibaba on the $1.5 billion Hong Kong listing in 2007 of its Alibaba.com subsidiary, would have handled the parent’s listing had it been in Hong Kong instead of New York. Along with the IPO, Simpson Thacher is representing Alibaba on its $1.13 billion bid for digital mapping company AutoNavi Holdings Ltd. Slaughter and May recently acted for Alibaba on its $692 million investment in Intime Retail Group Co., a Chinese operator of department stores and shopping malls.
Meanwhile, outside the Alibaba camp, Skadden is advising JD.com on its planned $1.5 billion IPO, while Davis Polk is acting as underwriter’s counsel. Both firms also have worked on many deals for Baidu: Davis Polk last year advised the Chinese search giant on its $1.9 billion acquisition of app store 91 Wireless Websoft Ltd. and a $370 million investment in online video streaming site PPStream, while Skadden advised on Baidu’s $160 million investment in online retailer Nuomi Holdings Inc. Davis Polk also recently advised Tencent on its $215 million investment in JD.com as well as a $400 million investment in online restaurant review site Dianping Holdings Ltd. Other firms active for Tencent include Paul, Weiss, Rifkind, Wharton & Garrison; Covington & Burling; and Wilson Sonsini Goodrich & Rosati.
Chinese tech companies are hardly alone in demanding their firms shun competitors. Several lawyers pointed out that U.S. tech leaders like Google Inc., Microsoft Corp., Apple Inc. and Facebook also don’t like to share counsel. Market-leading companies in other industries often take a similar approach with firms.
This is often understood. “If you represent Google,” says a China partner with a Silicon Valley firm, “you don’t try to get Facebook’s IPO. Nor will Facebook approach you.”
A Beijing partner with a U.S. firm says companies have some legitimate concerns about sharing legal counsel with a competitor. “Clients usually explain to us their strategies and why they are making the investments and so forth,” he says. “As lawyers, we have a professional responsibility to protect clients’ privileged information, but I can understand their concern over a potential disclosure if their firm also works for their competitors.”
But lawyers say the Chinese tech market hasn’t been all restrictive up to now. The leading lawyers in the sector often represent multiple companies that would be considered direct competitors, points out one Shanghai partner with a California firm. “Usually, unless it evolves sensitive intellectual property issues or litigation, there isn’t necessarily a conflict.”
In the fast-growing but also rapidly evolving China market, there is also concern about backing the wrong horse too soon. Some lawyers note that just three years ago, an Alibaba IPO seemed far from certain, and the company seemed mired in a messy dispute with investors Yahoo Inc. and Softbank Corp. Other Chinese Internet companies were getting more buzz at the time, and some firms decided to chase the deals that wound up disqualifying them from work for Alibaba.
But would hopping on the Alibaba wagon to the exclusion of others be the right call now?
“Firms want to take on these clients only when they know the client can generate a regular stream of meaningful deals longer-term,” says a Hong Kong partner with a U.K. firm.
He thinks Alibaba could do that, though. The company, currently valued at around $150 billion, is expected to see its market capitalization top $200 billion after its IPO later this year, giving it plenty of money for acquisitions and other investments.
“Only an 800-pound gorilla like Alibaba can make this kind of demand,” the partner says.
“Alibaba is not my client but I wish it was,” says another Hong Kong–based partner who has previously acted for some of the company’s competitors. “If you can score a big client like Alibaba, you can afford to lose one or two clients.”
The Beijing partner with the midsize firm says Alibaba said it would guarantee each of the firms selected for its panel a certain amount of business each year.
“This is a very attractive offer to firms,” he says, noting that most firms are pragmatic in deciding among conflicting clients. “They will consider the long-term relationship and go for the one with more potential business.”
But he says his firm decided not to try to get on Alibaba’s panel out of a feeling of loyalty to a competing company that was highly supportive when the firm first opened in China.
“They gave us a lot of work,” he says. “Those weren’t very big deals, but we aren’t going to lose an early supporter for another client. I think, in China, loyalty is very important.”