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Magic word greed opens $228 billion Alibaba valuation

The magic word "greed" has opened a $228-billion valuation for Alibaba. The Chinese e-commerce giant led by Jack Ma saw its shares pop 36 per cent at the open in New York. Staggering growth and margins proved irresistible to global investors, overshadowing the cloudy governance, frenetic dealmaking and corporate structure that could yet prove a trap.

The company and insiders will have sold $25-billion of stock, counting shares allotted to underwriters. That's the biggest initial public offering (IPO) ever. Despite dominating Chinese e-commerce, with about 80 percent of all online sales, the company is still growing at warp speed. It signed up 24 million new active buyers in the most recent quarter and revenue is rising at more than a 40 per cent clip. It is also astoundingly profitable. About half of its revenue is turned into operating income, and that margin has been rising.

Such a large pop in the shares also shows the power of a simple, seductive story. China is gigantic, e-commerce is hot, and Alibaba holds the password to this gigantic treasure chest. Yet such a tale glosses over more than a few worrying details.

Alibaba investors do not control their destiny. A committee of 27 employees of the company and its affiliates nominates a majority of the board. Investors don't have direct ownership either, as the company is structured as a variable interest entity to get around China's foreign-ownership rules. Ma personally holds important licences. There is also a litany of related-party transactions - such as Ma's ownership of the vehicle that owns the company's payments business - that create potential conflicts of interest.

Similarly, Ma's sudden decision to buy a stake in a football team after going out drinking with the team's chairman, and the emergence of questionable accounting in a film affiliate it purchased this year, raise questions about whether the company will fritter away its capital with poor acquisitions far afield from its core business.

The market has clearly spoken, however. A 30 per cent-plus pop is impressive, especially considering the gigantic size of Alibaba's offering. The cave may be dangerous, but investors are clearly convinced it contains vast amounts of treasure.