BofA Said to Profit From Alibaba Even After IPO Snub

By Ruth David, Zijing Wu and Bei Hu

Bank of America Corp. (BAC), one of the few large banks that isn’t working on Alibaba Group Holding Ltd.’s initial public offering, has found another way to make a buck on the deal.
The Charlotte, North Carolina-based bank is giving investors a chance to bet on Alibaba’s performance by offering them a product that uses the e-commerce company’s largest shareholder, SoftBank Corp. (9984), as a basis for approximating Alibaba’s valuation. It strips out the main listed businesses that SoftBank owns -- Sprint Corp. and Yahoo Japan Corp. -- through short positions.
The bank has found takers as investors scramble for ways to profit from the biggest Internet debut since Facebook Inc., and the trades have earned the
U.S. bank millions of dollars of commissions, people with knowledge of the matter said. Demand for Alibaba’s $21.1 billion IPO is high enough that the company plans to stop taking orders earlier than scheduled.
An index Bank of America compiled that represents the synthetic Alibaba trade has tripled since a Mar. 4 low, according to data compiled by Bloomberg. Bank of America typically charges investors as much as 1 percent of the size of each trade for structured products like the Alibaba one, in line with other banks, said one of the people, asking not to be identified discussing a private matter.

Photographer: Nelson Ching/Bloomberg

People walk through Alibaba.com Ltd.'s headquarters in Hangzhou, Zhejiang Province, China.

Bank of America, along with UBS AG and Barclays Plc, worked on the the IPO of JD.com Inc. (JD), a Chinese e-commerce rival, creating a conflict that kept them from working on Alibaba’s sale, people with knowledge of the matter said.

KDDI Short

Banks with lead roles on Alibaba’s IPO stand to make about $30 million each in fees, a person with knowledge of the matter said. Credit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and Citigroup Inc. have the most senior roles on the offering.
Mark Tsang, a spokesman for Bank of America in Hong Kong, declined to comment on fees from the Alibaba product. Justin Dini, a spokesman for Alibaba at Brunswick Group LLC, declined to comment.
Bank of America’s Alibaba index includes a long position in SoftBank and short positions in Sprint, Yahoo Japan and KDDI Corp., data compiled by Bloomberg show. SoftBank, run by billionaire Masayoshi Son, owns stakes in Alibaba, Sprint and Yahoo Japan, and competes with KDDI in offering mobile-phone services in Japan.
The short position in KDDI is a way to “hedge out” SoftBank’s unlisted telecommunications operations, according to a Sept. 8 Bank of America note to clients.
About $500 million of these synthetic Alibaba securities are outstanding, said people with knowledge of the matter.

Biggest Broker

People who sell short borrow a security and hope to profit by repurchasing it later at a lower price and returning it to the holder.
Bank of America is ranked 7th in managing IPOs globally this year. Goldman Sachs is the top IPO underwriter, followed by Morgan Stanley, according to data compiled by Bloomberg.
At the top end of the marketed price range of $60 to $66 a share, Alibaba’s IPO would be the largest in U.S. history. Including an overallotment of shares to underwriters, known as a green shoe option, could take it past the sale of Agricultural Bank of China Ltd. as the world’s biggest ever.