Effective or ineffective handling of a managerial situation

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908C06
THE GARDEN DEPOT
Karin Koopmans wrote this case under the supervision of Professor Elizabeth M. A. Grasby solely to provide material for class
discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may
have disguised certain names and other identifying information to protect confidentiality.
Ivey Management Services prohibits any form of reproduction, storage or transmittal without its written permission. Reproduction of
this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to
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Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail [email protected]
Copyright © 2007, Ivey Management Services Version: (A) 2008-01-30
―I can’t take this anymore! When is Derek going to start doing his job?‖ exclaimed Janice Bowman, after
hanging up the phone. It was an early June morning in 2007 when Bowman, office manager at the Garden
Depot (The Depot), had again dealt with a very irate customer. The phone call was one of many that
Bowman had taken during the past four months concerning the lack of communication between Derek
Sinclair, the Barrie, Ontario, store’s landscaping manager, and his customers. This call was the last straw
for Bowman, compounding her anxiety about numerous labor and organizational problems she had
witnessed in the landscaping division. Bowman knew that extensive changes needed to be made if she
were to do her job effectively while, at the same time, managing to avoid involvement in the landscaping
division’s problems.
THE GARDEN DEPOT
The Depot originated in 1985 as a small, family-owned floral company in Barrie, Ontario. As sales and
profits grew, the company began carrying a larger variety of floral, gardening and lawn-care products. In
1992, The Depot launched a lawn maintenance department to capitalize on the growing desires of
customers to have professionals take care of their lawns. Responding again to customer demand, The
Depot created a landscaping division in 1998, offering complete custom landscaping packages, waterfalls
and sprinkler systems. By 2007, The Depot operated a successful 12,000-square-foot retail store, a lawn
maintenance division and a landscaping division (see Exhibit 1 for an organizational chart).
Due to the nature of the gardening business, The Depot’s sales fluctuated with seasonal demands. It was
always a challenge to recruit and retain qualified staff, and management was often forced to downsize staff
during the winter months. During peak summer months, 80 per cent of The Depot’s employees were
students who would leave at the end of the summer to return to school in September. There was no formal
performance appraisal system at The Depot, nor any defined job responsibilities. The Depot’s owners
relied on department managers to deal with any labor issues.
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Page 2 9B08C006
JANICE BOWMAN
Janice Bowman began her career in the gardening industry in 1992, working as a general manager for one
of Garden Depot’s competitors. After 13 years of service, personal differences with management forced
Bowman to leave the company. Upon hearing of her availability, The Depot approached Bowman with an
offer in June 2005, which she accepted, to join the company immediately. Although there was no
particular opening for her, management was confident that The Depot could benefit from her 13 years of
operational knowledge in the industry. In her first few months, Bowman was asked to organize the
computer inventory system and develop a material ordering system. After the first few months, Bowman
began to work on other small projects within every division of the company, sharing her knowledge
wherever it was needed.
Bowman described herself as a dedicated worker who was happy to help co-workers whenever they
needed help. She was never one to say ―that’s not my job,‖ and she could often be seen cleaning shelves
on the retail floor. She took great pride in her job and wanted to ensure all areas of the business were
running smoothly. She described herself as highly customer-oriented and would go out of her way to
ensure customers had a positive experience with The Depot.
In March 2006, Bowman’s manager, Dave Sampson, suggested they sit down informally and discuss her
performance to date. The informal appraisal was highly positive; however, Sampson had noted that Janice
was involved in too many areas of the business, and this level of involvement was not sustainable. They
decided to loosely define her job title as ―office manager,‖ which included tasks such as inventory
management, computer system management and logistics.
Although Bowman often worked seven days a week without complaint, she was growing increasingly
frustrated with how The Depot’s landscaping division was run. Since her job relied on information
provided by this division, she deemed it her responsibility to try to solve many of the division’s issues.
She knew that if no action were taken, she would spend more hours trying to fix the division’s mistakes
and more hours taking customer complaints.
THE LANDSCAPING DIVISION
The landscaping division was responsible for designing and installing custom landscaping, including rock
walls, gardens, waterfalls and sprinkler systems. The division employed 12 landscapers, 11 of whom were
part-time summer staff. The department managed to complete approximately 50 landscaping jobs each
year, which were fewer than what was demanded, resulting in many jobs being pushed back to the
following spring if they could not be completed in the fall.
In January 2007, the manager of the landscaping division left the company to pursue other opportunities.
In a move that was viewed as questionable by many full-time employees, The Depot’s owner hired his 35-
year-old son-in-law, Derek Sinclair, as the new manager of the division. Many staff worried that The
Depot’s owner was doing his son-in-law a favor by hiring him, given that he appeared unqualified for the
position. Bowman noted some immediate problems with Sinclair’s integration into his position and with
his management capabilities.
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Page 3 9B08C006
MURRAY KING, PRESIDENT
Murray and Glenda King started the Garden Depot in 1985 based on their shared love of gardening. The
husband-and-wife team had been equally involved in growing the business until 2004, when Glenda
retired. Murray King was a ―hands-off‖ manager who trusted his division managers to run their respective
divisions appropriately. King worked at The Depot five days a week, spending most of his time in his
office. Bowman’s interaction with King had been limited to asking him questions when she needed
clarification. On more than one occasion, King would claim to know nothing about what Bowman was
asking, leading her to believe he was quite removed from many of the day-to-day activities in the business.
Bowman had observed that King spent endless hours crunching performance metrics in his office, but very
little time was spent on planning the company’s strategic direction. Bowman chose not to involve King in
any of the issues she was having with the landscaping division since he appeared to be far removed from
its operations. In fact, King had commented on more than one occasion that Sinclair was doing a superb
job and he was happy with Sinclair’s performance to date. Bowman noted that Sinclair had a strong
rapport with King and would often be in King’s office chatting casually; in fact, if Sinclair had any
concerns or problems, he took them directly to King for discussion.
DAVE SAMPSON, GENERAL MANAGER
Dave Sampson joined The Depot as its general manager in 2002 and was responsible for ensuring the
overall financial health of the company. Sampson had a good relationship with all division managers and
was well respected by all employees. Sampson spent most of his time in the retail side of the business,
wherein he managed the retail staff, ensured the store looked presentable and kept an eye on sales levels
and profitability. Despite this concentration, King had commented that Sampson was responsible for the
operating efficiency of both the landscaping and maintenance divisions.
Sampson gave his subordinates a lot of autonomy to run their own divisions and intervened only when
problems became too burdensome for managers to solve. Sampson was receptive and approachable; thus,
many employees approached him for help. Sampson and Bowman were good friends and they often spent
time discussing the company’s problems and how they might solve these problems.
DEREK SINCLAIR, LANDSCAPING MANAGER
Derek Sinclair joined The Depot as landscaping manager in late January 2007. Sinclair’s previous work
experience included being a dispatcher at a local towing company, where he claimed to learn skills such as
paying attention to details and strong customer orientation. Beyond these skills, Sinclair had no prior
experience in the retail, construction or landscaping environments, and he had no previous management
experience. As a manager at The Depot, Sinclair’s responsibilities covered four key categories:
organizing and deploying landscapers to job sites, dealing with customers and responding to customer
concerns, invoicing completed landscaping jobs and traveling to clients’ homes to quote1
jobs.

1
Quoting involved meeting the customers at their homes to discuss their landscaping goals and providing these customers
with a cost estimate of the job.
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Page 4 9B08C006
EARLY PROBLEMS
Within a few weeks, Bowman noticed many of Sinclair’s limitations in his role. First, because he lacked
any experience in landscaping, Sinclair was unable to answer specific customer questions when they
called, which often led him to avoid answering the phones altogether. Bowman also noted that many jobs
were not priced according to the cost of the materials being used; she suspected that Sinclair was not
accurately quoting jobs since he was unsure which materials would have to be used. Whenever Bowman
approached Sinclair’s desk, she noticed numerous incomplete invoices scattered over it, some with dates
many weeks old. This meant that clients were not getting billed for landscaping work that had been
completed. Bowman sympathized with Sinclair, so she had approached him at the end of February to offer
help with the invoicing responsibilities. Sinclair appeared relieved and was happy that Bowman had come
to his aid.
By the end of March, Bowman had taken over the majority of Sinclair’s invoicing duties, in addition to her
own job responsibilities. While her initial offer was to help alleviate some of Sinclair’s load, Bowman
soon found that Sinclair was sending her every single invoice and was not completing any of the work
himself. After four weeks, Bowman had become frustrated. She had spent four Saturdays catching up on
the invoicing, while noting that Sinclair had not worked a single weekend since his employment with The
Depot.
Bowman approached Sampson about the situation:
Dave, I feel like I’m being used. It has become clear that I am doing all of Derek’s work
on top of my own. I am simply running out of time to get everything done. I’m spending
all my weekends here to catch up on his work!
Sampson agreed that this was not Bowman’s responsibility, so he approached Sinclair and told him that he
would need to find a way to manage the invoicing on his own. Bowman felt relieved that Sinclair would
be reclaiming this work, and she could return to concentrating on her primary inventory management
responsibilities; however, it wasn’t long until continuing problems in the landscaping department
resurfaced.
INVENTORY CONCERNS
Job Slips
Bowman was solely responsible for ensuring that parts and supplies arrived in a timely fashion and were in
ample supply when required by the landscaping division. Stock-outs were costly to the company since it
could hold up a client’s job for numerous days until additional supplies could be ordered. In order to
account properly for the flow of goods, the landscaping division was responsible for forwarding customer
invoices and job slips to Bowman. A job slip was a list of all supplies and materials used at a job site in
order to accurately charge clients for the material cost of their landscaping (see Exhibit 2 for a sample job
slip.) Bowman would then take the supplies used on each job out of the computerized inventory system
and reorder supplies if necessary. She also ensured that payments were received from customers. Not long
after Sinclair had resumed his invoicing responsibilities, Bowman began to note that the customers’
invoices were still grossly underpriced on the job slips, since the listed materials were not the actual
materials used on the job.
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Page 5 9B08C006
Bowman was also struggling to keep track of the materials that had been used on each customer’s job. She
was constantly receiving job slips that were clearly missing materials that would have had to be used,
given the nature of the job being invoiced. For example, if a customer had received a sprinkler system for
a 1,000-square-foot yard, a minimum of six sprinkler heads would have had to be used. Bowman would
receive a job slip listing three sprinkler heads and hardly any plumbing supplies. She assumed that the
landscaping staff was either too lazy to account for each and every material item used or they didn’t know
what parts they were using and could not describe them on job slips. To alleviate this problem, Bowman
prepared detailed binders with pictures and product codes for all materials used on a job site and gave a
binder to each of the 12 landscapers. Despite all of these efforts, Bowman still noticed inconsistencies on
the job slips and was forced to track down the landscapers to clarify which materials had been used.
Bowman finally decided to approach Sinclair about the issue.
Bowman: ―Derek, you need to go over each job slip with staff and ensure that they are complete. I’ve
found many parts missing off these slips, and I don’t trust that customers are getting billed accordingly. I
simply can’t spend time chasing every worker around to make sure the job slips are correct. I suspect we
are losing a lot of money on these jobs.‖
Sinclair: ―Is it really a big deal? A dollar here and there isn’t going to affect the company. The parts used
on these jobs are not expensive.‖
Bowman: ―Well, I suspect that we are talking about more than a few dollars. Even so, if I can’t keep track
of how many parts we have in inventory, I’ll never know when to reorder them. It’s too costly to run out
of parts.‖
Sinclair: ―All right, Janice. I will make a stronger effort to review the slips and keep the inventory on
track. If it takes me reviewing each and every one at the end of the day, I’ll do it.‖
Although Sinclair’s promise sounded sincere, Bowman noted that when the landscapers returned to The
Depot at 6 p.m. after completing their jobs, Sinclair had already left for the day and the job slips were not
reviewed.
John Campbell
When walking by Sinclair’s desk, Bowman was surprised to see John Campbell, a part-time student
landscaper, at the computer entering new invoices. Campbell explained that Sinclair had told him that he
was now responsible for invoicing duties and that he was not sure how to do them. Bowman could not
believe that Sinclair had shifted this responsibility to someone with no invoicing experience, and she
suddenly realized that the past weeks’ invoices were most likely not accurate. Bowman told Campbell not
to hesitate to ask her if he had any questions. In the four weeks that passed, Campbell never approached
Bowman with any questions, so she believed she had no choice but to fix the invoices herself. Though
displeased with this arrangement, Bowman chose not to complain to anyone, and she continued to fix
invoices on her own.
This document is authorized for use only by Samantha Panizo Baiocchi in WCM-610-X4388 Intro Org Conflict Mgmt 20TW4 at Southern New Hampshire University, 2020.
Page 6 9B08C006
OTHER CONCERNS
Sinclair’s Leadership
Bowman knew she was not the only one questioning Sinclair’s ability. Bowman’s son, Marcus, had
recently joined the landscaping staff on a part-time basis and had daily interaction with Sinclair. With 12
years of previous experience in the garden industry, Marcus knew all aspects of landscape planning and
building. After one month working under Sinclair’s leadership, Marcus commented:
I’ve never seen a landscaping department run so poorly. Derek is completely useless at all
aspects of his job. He has no time-management skills or concept of how to schedule
landscaping jobs in a time-effective manner. He lacks a customer focus and often avoids
taking customer calls. Everything Derek does is reactive, always waiting for customer
complaints rather than taking action to provide good service. I’m sick of showing up at
customers’ houses and getting yelled at for Derek’s incompetence.
Bowman wondered whether other staff members felt the same way. She was concerned about the impact
Sinclair’s leadership may be having on staff morale.
Customer Complaints
Bowman was getting increasingly anxious about the large number of customer complaints she was
receiving. When a customer called the store looking for a specific person, they could either leave a
voicemail for the requested person if he or she was not available, or they would be given the opportunity to
speak with someone else. Bowman was well known and well liked by many of The Depot’s regular
customers and, thus, was often asked for on the phone by name. Unfortunately, the majority of the calls
Bowman was taking lately were customer complaints about how Sinclair had not returned his calls or how
their invoices were not similar to the quote provided by Sinclair. Bowman often sympathized with
customers, commenting:
It’s just not fair to the customers. All they want are updates on when they can expect their
landscaping job to be completed, and Derek doesn’t bother to call them back. It really
doesn’t take a lot of effort to keep customers happy — it’s all about communication. I
find myself promising customers that I will personally follow up with them after speaking
with Derek, which only adds to my workload. I’m tired of getting yelled at for
circumstances not under my control, and I feel guilty working for a company that treats
customers so poorly.
Bowman was unsure whether she should approach Sinclair about these concerns and, if she did, whether
she could trust that he would change.
Staff Problems
Bowman’s concerns about the landscaping division and Sinclair’s management style were exacerbated by
the strange behavior of one of the landscapers, Jayme Strong. Jayme joined The Depot’s staff as a fulltime landscaper in April 2007. He had two years’ previous experience with another landscaping company,
and he appeared to get along well with the other staff. Strong was expected to work approximately eight
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Page 7 9B08C006
hours a day, five days per week. When Bowman received the employee time cards,2
she noticed that
Strong’s assigned jobs took longer than comparable jobs on other employees’ timecards (see Exhibit 3 for
a sample time card.)
One day, Bowman was speaking with a long-time customer, Mr. Gladwell, who had purchased some rocks
and garden supplies to create his own landscaped garden. At numerous points in the conversation, Mr.
Gladwell mentioned how Strong had arranged the flowerbeds and installed things so beautifully.
Knowing that the customer had not paid for any installation services from The Depot lately, Bowman
approached Sinclair:
Bowman: ―Derek, I just had an odd conversation with Mr. Gladwell, who mentioned that Jayme had
installed some of his flowerbeds. Didn’t he only purchase materials from us?‖
Sinclair: ―Oh yes … Well, Jayme just did some of the install for him while he was in the area. It’s not a
big deal really. We made enough money off of selling him the materials anyways. Who cares?‖
Bowman simply shrugged and walked away, appalled that Sinclair would let Strong do volunteer work on
company time. She wondered whether Strong had masked this work at Mr. Gladwell’s in his time cards by
extending his reported time on other jobs. She was concerned that other customers may have been
overcharged for hours that Strong was not actually working there. Furthermore, was Strong charging Mr.
Gladwell for his work and keeping the money himself?
Bowman began to think Strong was not only dishonest recording his time cards but also potentially
stealing goods from the company. In early April, right around the time Strong joined the staff, Bowman
was baffled when a sprinkler system, which was in stock according to the computerized inventory, was
nowhere to be found. A few weeks later, The Depot’s bookkeeper approached Bowman with an
interesting story. She mentioned that friends of hers had a new state-of-the-art sprinkler system installed,
which they gushed was a ―bargain deal.‖ They mentioned that they bought the system from a young man
named ―Jayme‖ who had also been kind enough to install it for them at a very cheap rate. Bowman
thought this was very suspicious but she had no proof to confirm what she thought to be true — that Strong
was working on personal jobs on company time and stealing supplies to do them.
Bowman had mentioned these odd occurrences to Sinclair, but he never expressed as much concern as
Bowman. Although Bowman knew that Sinclair was Strong’s boss, Sinclair appeared to have no desire to
discipline Strong in any way or to further investigate these mysterious situations. Bowman was finding it
difficult to ignore behavior that could have devastating effects on the company’s financial position and
reputation.
THE FINAL STRAW
After hanging up with yet another irate customer, Bowman was exasperated. This was not the first
complaint she had to deal with concerning Sinclair and his refusal to return customers’ calls or to keep
them informed about the progress of their landscaping job. In Bowman’s view, the landscaping division
was completely disorganized, and she was not confident that Sinclair was interested in keeping things
under control. Bowman feared that soon customers would be going elsewhere and the longevity of
company would be in question. She knew something would have to change if she was going to continue
working at The Depot, but she did not know where to start.

2
Employees were required to fill out time cards. The time cards detailed which jobs they worked on and for how long.
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Page 8 9B08C006
Exhibit 1
ORGANIZATIONAL CHART
Retail
Division
Lawn
Maintenance
Division
Landscaping
Division
Administration
Office
General Manager
Dave Sampson
Owner /President
Murray King
Retail staff
(6)
Manager
Sue Jenkins
Landscapers (12)
including
Jayme Strong
Manager
Derek Sinclair
Laborers
(3)
Manager
Jim Chambers
Bookkeeper
Nancy Coss
Office Manager
Janice Bowman
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Page 9 9B08C006
Exhibit 2
SAMPLE JOB SLIP
Customer Name: M. Jones Job #: 006 Date Job Completed: April 16, 2007
Flowers/Shrubbery Rock/Stone Plumbing/Fittings Misc.
Quantity/Description
2 Potted Gardenias ____ 5 Elbow fittings 4 A+ 4lb Soil
8 Rose buds ____ 6 Bronze Sprinklers ____
____ ____ ____ ____
____ ____ ____ ____
____ ____ ____ ____
____ ____ ____ ____
10 ____ 11 4 Total
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Page 10 9B08C006
Exhibit 3
SAMPLE TIME SHEET
Employee Name: K. Roberts Employee #: 002 Time period: April 1/07 – April 7/07
Date Customer Name (hrs) Hours
Mon 01 Simpson (4), Cobb (2), Gyll (2) 6
Tues 02 Sanders (3), Walsh (2), Cobb (2), Leighton (1) 8
Wed 03 Gyll (2), Warner (1), Walsh (3), Cobb (2) 8
Thurs 04 Leighton (5), Simpson (2) 7
Fri 05 Warner (4), Gyll (1), Simpson (3) 8
Sat 06 Day Off
Sun 07 Day off
Weekly Total Hours 37
X K. Roberts
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Effective or ineffective handling of a managerial situation.

W14598

ALIBABAS IPO DILEMMA: HONG KONG OR NEW YORK? Emir Hrnji wrote this case solely to provide material for class discussion. The author does not intend to illustrate either effective or ineffective handling of a managerial situation. The author may have disguised certain names and other identifying information to protect confidentiality. Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmission without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Richard Ivey School of Business Foundation, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; [email protected] 2014, National University of Singapore and Richard Ivey School of Business Foundation Version: 2018-09-18

Alibaba Groups founder, Jack Ma, was named the Financial Times 2013 Person of the Year, joining the likes of Steve Jobs, Barack Obama and Google co-founders Sergey Brin and Larry Page. Even though Jack Ma had experienced a cult-like following in China similar to that of Steve Jobs in the United States, he was relatively unknown outside of China. Only after Alibaba Group started its preparations for the long-awaited initial public offering (IPO) and began negotiations with different stock exchanges, did this vivacious leader start making global headlines. While Jack Ma had been receiving most of the press attention, Alibabas executive vice-president, Yale-educated Joe Tsai, led efforts for Alibabas IPO.1 In April 2014, Tsai faced several decisions regarding the IPO. Should Alibaba maintain its rigid stand on its proposed governance structure despite resistance from the Hong Kong Stock Exchange? When would be the best timing for its IPO? How should the company price its shares in one of the most anticipated IPOs of the 21st century? ALIBABA GROUP2 By early 2014, Alibaba Group had emerged as one of the worlds leading e-commerce companies with 24,000 employees located in China, India, the United States, the United Kingdom and Singapore. Two of the more successful businesses within Alibaba Group, Taobao.com and Tmall.com, became Chinas most popular consumer-to-consumer (C2C) and business-to-consumer (B2C) online shopping destinations, respectively. In fact, the gross merchandise volume (GMV) of these two businesses exceeded RMB1 trillion (US$164 billion3) for the year ending March 31, 2013. This accounted for 80 per cent of the entire B2C and C2C e-commerce in China ($204 billion in 2012), and was larger than Amazon ($86 billion) and eBay ($67.8 billion) combined. Other aspects of Alibabas business included online payment systems, cloud computing and mobile Internet services. Alibabas ascent began in 1999, when Jack Ma, then an English teacher, shared his vision with Alibaba co-founders in his apartment. Alibaba Group utilized a simple business model of creating a platform for buyers and sellers to meet and transact. It was founded on two major insights: the cost-consciousness and importance of trust for Chinese consumers. Alibaba catered to the cost-consciousness of the Chinese population by making membership free.4 Thus, while buyers and sellers could use Alibaba for free, the

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Page 2 9B14N035 sellers had to advertise heavily in order to attract customers, which generated large advertising fees for Alibaba. Alibaba also catered to the importance of trust by providing tools to build trust between buyers and sellers. It did so through an independent verification service, as well as the Alipay payments system (similar to PayPal), which placed monies received in an escrow account.5 By tailoring its business model to these observations about its customers, Alibaba turned out to be extremely successful. One analyst described Alibaba as a mixture of retailers like Amazon and eBay, financial services like PayPal and a search engine giant like Google.6 Jack Ma explained the philosophy behind his direction for Alibaba in the following words: I always believed we shouldnt build an empire, instead, we should build an ecosystem. Every empire will be toppled someday, but an ecosystem is sustainable.7 E-Commerce in China Analysts estimated that Chinas online retail market would rise to 9 per cent of Chinas RMB31.5 trillion ($5.17 trillion) retail market by 2015, and to 25 per cent by 2028.8 Furthermore, The Economist predicted that by 2020, Chinese e-commerce would surpass that of America, Britain, Japan, Germany and France combined.9 The world had great expectations for the Chinese e-commerce market, where Alibaba was poised to be a dominant player. Alibabas Competition China was becoming increasingly tech-savvy, with the number of Chinese Internet users estimated to be 612 million in 2014.10 Alibabas Tmall controlled the market share of roughly 50 per cent in the B2C market, while Taobao controlled more than 90 per cent in the C2C market. Within the B2C market, the closest competitors JD.com and electronics specialist Suning enjoyed 13 per cent and 3 per cent of the market share, respectively.11 Within the C2C market, Paipai (owned by Tencent) came in a distant second (see Exhibit 1). Alibaba did not perceive U.S. competitors such as Amazon, eBay and Google to be major threats. The lack of serious competition was partially due to restrictive Chinese Internet laws. For instance, Internet users in China were under the Golden Shield Project, colloquially known as the Great Firewall.12 Following tensions over Tibet, Chinese government expressly banned Internet users access to Facebook, YouTube and Twitter.13 Among local competitors, Alibaba fiercely competed with Tencent, which had a market capitalization of $110 billion. Another Alibaba competitor, Baidu, the largest Chinese search engine with a market capitalization of $60 billion, accounted for nearly 80 per cent of the search market in China.14 Acquisition Spree In June 2010, Alibabas acquisition of California-based e-commerce software firm Vendio represented the companys first attempt to expand the companys B2B2C model in the United States.15 Alibaba projected that Vendios customer base, consisting of 80,000 small U.S. businesses, would source products from Alibabas supplier network and then resell them through eBay, Amazon and other online stores.16 Alibaba continued to acquire more U.S. companies in subsequent years. In June 2013, Alibaba bought a minority stake in Fanatics Inc., an online retailer of official licensed sports merchandise with $1 billion in annual revenue.17 Four months later, Alibaba invested in ShopRunner, an e-commerce website that offered, in exchange for a small annual fee, unlimited two-day shipping from a number of retailers such

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Page 3 9B14N035 as GNC, Nine West and Tommy Hilfiger.18 At the time of the acquisition, ShopRunner was valued at about $600 million.19 Even though Amazons 10 million members dwarfed ShopRunners membership of one million,20 analysts perceived these acquisitions as Alibabas attempt to compete with Amazon on its home turf. Alibaba remained active in the acquisition market in China as well. In April 2013, the company bought an 18 per cent stake in Sina Weibo for almost $600 million.21 Alibaba and Weibo expected their partnership to generate $380 million in advertising revenues by 2016.22 A month later, Alibaba invested $294 million in AutoNavi, the Chinese equivalent of Google Maps and Chinas top online mapping company. While Alibaba could use AutoNavi in different ways, such as location-based marketing, the most immediate benefit to Alibaba was AutoNavis 100 million users on its mobile apps.23 In September 2013, Alibaba Group acquired the cloud storage service Kanbox (the Chinese equivalent of Dropbox with more than 15 million users).24 However, Alibaba did not stop at Internet acquisitions. Ma said: The new economy is not the digital economy, but rather, one that combines the real economy and digital economy, a true blending of virtual and real.25 In December 2013, Alibaba formed a strategic partnership with Haier, whose subsidiary, Goodaymart, owned nine shipping bases, 90 logistics delivery centres and 2 million square metres in warehouse space across China.26 This acquisition appeared to be consistent with Alibabas strategy of investing in distribution networks, instead of building and developing its own. In 2014, Alibaba completed several acquisitions, including a purchase of a minority stake in Intime Retail Group (which owned 36 department stores and shopping centres in China) in an apparent plan to merge its e-commerce business with its retail business27 and a 60 per cent stake in the Chinese entertainment company ChinaVision.28 IPO PLANS Alibaba needed money to fund further acquisitions and the impending IPO was supposed to generate proceeds for this purpose. In May 2013, Ma announced that Alibaba was ready for an IPO.29 The Hong Kong Stock Exchange (HKEx) seemed to be a natural fit for Alibabas public offering. Even though Alibaba prided itself on being a global company, the majority of its business revenues were generated within China. Furthermore, most Hong Kong investors were familiar with Alibabas business as they had used Alibabas services before. Overall, proximity, culture and language of Hong Kong investors appeared to make HKEx the favoured choice over other global exchanges. Trading Location Some argued that the listing destination should be irrelevant for such a decision. Indeed, if world stock exchanges were fully integrated, there should be no pricing differences for the same stock in different trading locations. One principle of finance was that the fundamental company value should be determined by the present value of the companys cash flows discounted at the appropriate discount rate (determined by risk profile of these cash flows).30 In this case, global investors would value Alibabas underlying business and, consequently, the price of the shares would fully incorporate these estimates. Thus, in a frictionless world, valuations should depend solely on the company and not on the trading location. In other words, Alibabas shares would theoretically have the same price regardless of a listing in Hong Kong or in New York.

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Page 4 9B14N035 In contrast, academic research argued that trading location may influence pricing. Extant literature presented the evidence of frictions between exchanges, thus causing shares to be priced differently depending on their trading locations. For instance, prices of U.S.-traded foreign country funds were sensitive to the market movement in the U.S. market, even though their net asset values were completely determined by the asset values that were outside of the United States. Another seminal study found that prices of twin stocks, which have nearly identical cash flows, [moved] more like the markets where they trade most intensively.31 This evidence indicated that international markets were segmented.32 Proximity and familiarity of investors thus seemed to be important determinants in stock valuation. Dual-Class Ownership Structure Tensions between HKEx and Alibaba began to emerge as Alibaba insisted on having a partnership governance structure. This resembled dual-class share structure, which was not consistent with HKExs one share, one vote policy and was therefore not allowed for companies listed on HKEx. The dual-class share structure meant that different share classes could have different levels of control over the company. There were three major ways in which one class of shares could have greater control, as compared to another class of shares within the same company.33 First, one class of shares may have exclusive rights to control the composition of the board, while another class could have no voting power at all. Secondly, one class of shares may have a higher voting power per share as compared to another class. For instance, class B shares could have 10 times the voting power of class A shares. Finally, one class of shares may have the exclusive right to vote for a fixed number or percentage of directors, while the voting power of the other classes of shares may be limited to the rest of the directors only. This differential in voting power created a mismatch between cash flow rights and voting rights. It enabled the minority shareholders to exert disproportionate control over the company (see Exhibit 2). In companies with dual-class share structure, control typically resided with founders and top executives of the company. Such structures were commonly found in Internet companies such as Facebook, Google and LinkedIn.34 The media industry, comprising companies such as CBS, Discovery and the New York Times, was also fond of dual-class share structure.35 Proponents of the dual-class share structure argued that it allowed founders to maintain a long-term view because it insulated the top executives from the myopic Wall Street mentality of investors who were more likely to be primarily concerned with quarterly earnings. It also incentivized the founders to take their companies public at an early stage, without fear of losing control.36 Moreover, the dual-class share structure was also more transparent than many other ways of retaining founder control, such as pyramid ownership or cross-shareholdings, which were frequently employed in some countries such as Korea and Japan. Those against the dual-class share structure argued that it was not fair to ordinary shareholders. The imbalance in voting power could allow executives to entrench themselves, consume extravagant perks and take unnecessary risks all while bearing disproportionately fewer consequences of their actions. HKExs Position In 2013, different exchanges around the world had different views regarding dual-class share structure. For instance, U.S. exchanges such as the New York Stock Exchange (NYSE) and NASDAQ allowed listed companies to have a dual-class share structure. In contrast, the United Kingdom discouraged such

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Page 5 9B14N035 structures, while Asian exchanges such as China, Japan and Singapore banned them.37 Technically, HKEx allowed dual-class share structure in exceptional circumstances, but this provision had never been used. The Hong Kong Securities and Futures Commission firmly rejected Alibabas proposal, maintaining that there would be no exceptions to its one share, one vote policy. Charles Li, the chief executive of HKEx, articulated his opposition to Alibabas proposed governance structure in a widely read dream post on his blog on September 24, 2013. In his post, Li elaborated on different perspectives regarding the issue. The first perspective propagated status quo and followed the maxim, If it isnt broken, why fix it? However, most other exchanges in the world permitted dual-class structure to protect company founders visions. Ultimately, sophisticated investors were expected to incorporate governance differences in their valuation of these companies; they could value them at a discount. Li argued that the disclosure regime worked in the United States because its aggressive litigious culture provided checks and balances, and deterrents against abuse of the system.38 Alibabas Reaction The day after the publication of the blog, Tsai replied to elaborate on the proposed partnership structure that Alibaba preferred. The partnership structure would operate to allow the firms senior management (of 28 persons) to nominate a majority of candidates for the board of directors, which would be then voted upon by the shareholders.39 Alibaba wanted its partners to set the companys strategy without having to concern themselves with potentially fickle-minded and short-sighted public investors. Tsai thus argued that this structure would be in the long-term interest of all shareholders. He also added that the partnership structure would safeguard the Alibaba culture and sustain the innovation necessary to keep the company running. At the end of his post, he appealed to HKEx to consider the proposal. Alibaba obtained the approval of its main shareholders to utilize a partnership structure. SoftBanks president, Masayoshi Son, representing the largest shareholder with 37 per cent of the company, said: Alibaba has built a phenomenal business and created tremendous value for its shareholders over the years. Alibabas special culture is at the heart of its success and preserving it will be very important going forward.40 Yahoo!, the second largest shareholder with 24 per cent of the company, similarly supported the proposed partnership structure. Jacqueline Reses, chief development officer of Yahoo! and a director of Alibaba said: Yahoo! believes that managements efforts reflect the desire to govern the company for long-term success while also balancing the rights of shareholders.41 Other shareholders such as Temasek Holdings and China Investment Corporation did not voice objections. Alibabas Next Step Alibaba understood its importance to HKEx. For instance, another Chinese Internet giant, Tencent, had been listed on the HKEx in 2004, and had been accounting for roughly 3 per cent of HKExs daily trading volume.42 While Alibaba would not contribute much regarding annual fees, it had a potential to add an even higher percentage to HKExs daily trading volume. When the negotiations with HKEx failed, Alibaba moved on to negotiate with NASDAQ and NYSE. Indeed, many Chinese companies, such as Baidu and Renren, had already taken that path. NASDAQ and NYSE had been competing for new listings and Alibabas listing had the potential to provide advantage in the battle for a likely revival of Chinese IPOs.43 In October 2013, both NYSE and NASDAQ confirmed they would allow Alibaba to list with its proposed partnership structure.44 Li posted another opinion piece hinting that HKEx would be willing to consider

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Page 6 9B14N035 the public debate about alternative governance structures. The next day, Alibaba signaled that it would be willing to reconsider a listing in Hong Kong, if HKEx would change its mind or consider a compromise.45 On January 9, 2014, the Wall Street Journal reported that HKEx was ready for the public debate on allowing the listing of companies with different ownership structures.46 IPO MARKETS Hong Kong and New York The HKEx website stated that its mission was to be the global exchange of choice for Chinese clients and international clients who were seeking exposure to the Chinese market.47 Yet in the early 2000s, there remained a trend of Chinese companies who preferred to list in the United States. In 2010 alone, 41 Chinese companies went public in the United States, accounting for 26.6 per cent of all U.S. deals in that period.48 This naturally begged the question of why these companies had decided to list in the United States. First, they seemed to face an obstacle in the form of HKExs strict requirement that a private company had to post three years of profits before being listed.49 In contrast, U.S. exchanges did not have that requirement.50 Since many Internet companies did not have profits when they wished to go public to raise funds, the three-year profit requirement resulted in many high-tech companies opting to list in the United States, particularly on NASDAQ. Furthermore, companies believed that listing on U.S. exchanges would give them better visibility. U.S. exchanges also had an unmatched size and depth when compared to other global exchanges. Despite having more retail investors and family-run businesses in its listings, the level of legal protection that HKEx gave its investors did not seem to be as strong as in the United States. On the other hand, class action suits happened more frequently in the United States and this made litigation cost much higher than that in Hong Kong. Furthermore, compliance costs were higher and the Sarbanes-Oxley Act created additional requirements for companies that were listed in the United States.51 Also, Hong Kong investors were more familiar with Chinese companies. Moreover, after the scandals with China Media Express Holdings, Sino-Forest and other fraudulent Chinese companies that had been listed in the United States and Canada, many U.S. investors lost confidence in the accounting practices of Chinese companies (see Exhibit 3). Differences in IPO Process Since the 1990s, there had been a strong global trend of using the book building method of going public, especially in the United States.52 Global exchanges differed not only in institutional arrangements, but also regarding details of the process of going public. First, the IPO price in the United States could be freely determined and more than half of U.S. IPOs were priced outside the initial price range.53 In contrast, the price in Hong Kong was strictly limited to lie within the initial range.54 Second, in Hong Kong, retail investors were typically allocated 10 to 15 per cent of each IPO, but this fraction could go as high as 50 per cent if public demand was strong. In contrast, U.S. underwriters preferred to allocate shares to institutional investors. Third, pre-marketing an IPO in Hong Kong could start even before issuing a prospectus, while underwriters in the United States were not allowed to start collecting information about potential demand before filing with U. S. Securities and Exchange Commission (SEC).55 Finally, investment banking fees for medium- and large-sized IPOs ($25 to 250 million) were almost always 7 per cent in the United States; however, these fees were much lower in Hong Kong (2.5 to 3.5 per cent).56

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Page 7 9B14N035 VALUATION For the quarter ending March 31, 2013, Alibaba reported $1.38 billion of revenue and $668.7 million of net income according to Yahoo!s 10-Q.57 In the second quarter of 2013 (ending June 30, 2013), Alibaba revenues reached $1.74 billion. This was an increase of 61 per cent, as compared to the same period in the previous year. Net income also increased 159 per cent to reach $707 million.58 In the third quarter of 2013 (ending September 30, 2013), the company reported $1.81 billion in net revenue, similar to the same period last year. Alibabas financial statements are presented in Exhibits 4, 5 and 6. In comparison, Amazons 2013 sales reached $15.7 billion with a profit margin of 0.5 per cent.59 EBays revenues were $3.88 billion, with a net profit of $640 million.60 Twitter disclosed $422 million in 2013 revenues, and a net loss of $134 million.61 In 2014, Alibaba was expected to earn revenues of $8.6 billion and net income of $3.5 billion.62 Alibaba chief executive officer Jonathan Lu expected Alibaba to overtake Wal-Mart in revenues by 2016, when the total value of transactions should reach RMB3 trillion ($490 billion).63 In January 2014, Yahoo! reported that Alibabas third quarter net income increased by 12 per cent to $792 million, while revenue increased by 51 per cent to $1.78 billion (compared to the previous quarter).64 This was in comparison to the previous year, when Alibabas profit doubled in the quarter ending in December 2012, tripled in the quarter ending in March 2013, and doubled in the quarter ending in June 2013.65 Over the same period, Facebook posted net income of $422 million, while Yahoo! posted net income of $297 million. Market conditions appeared to be on the upswing. The NASDAQ index went up 38.3 per cent in 2013.66 In the same year, the Hang Seng Index increased by 2.9 per cent, led by the information technology sector with the upswing of 70 per cent.67 The shares of Chinese companies were rising, regardless of whether they were listed in the United States or in Hong Kong. The U.S. Internet stocks were also doing well. Facebook had a rocky start after going public, but eventually recovered. In contrast, Twitter started with a first day return of 73 per cent and had continued to rise ever since. At the same time, several Chinese tech companies such as Qunar and 58.com already filed for IPOs on the NYSE (see Exhibit 7). However, nothing exemplified the volatility of investors appetite for Chinese stocks as much as two major events. Chinese Amazon JD.coms sales had risen 96 per cent in 2012, and 68 per cent (to $11.5 billion) in 2013, but the company posted a net loss of $8 million in 2013. Yet, its IPO was strongly oversubscribed and the price jumped from $19 to $21.75 on the first day of trading.68 On the other hand, the worlds largest pork-producing company, WH Group, cancelled its IPO on HKEx due to the weak investors demand, even though the company reduced its offering size by more than a half.69 EPILOGUE Tsai faced many difficult decisions. Listing in Hong Kong or listing in New York each had its own pros and cons. While the Hong Kong investors knew Alibabas business better, New York investors valued Internet companies at higher multiples. Listing in Hong Kong would be a problem if HKEx refused to compromise its stance against companies with a dual-class structure. Moreover, Alibaba had to consider its valuation and IPO price: a lower IPO pricing would leave the money on the table but create buzz about the company, while a higher IPO price would result in more proceeds but risk alienating investors. Alibabas IPO timing remained another unresolved issue.

The authors would like to thank the Centre for Asset Management Research & Investments (CAMRI), NUS Business School for its donation to this case.

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Page 8 9B14N035

EXHIBIT 1: ALIBABAS MARKET SHARE (2013)

B2C (%) C2C (%) Mobile (%) Online Payment (%)

Tmall 49.08 TaoBao 92.59 TaoBao 81.45 Alipay 49 JingDong 18.16 Paipai 5.56 JingDong 6.67 Tenpay 20 Tencent B2C 5.68 Eachnet 1.85 Malmaibao 1.11 Unionpay 10 Suning 4.30

Suning 1.01 Others 21

Amazon China 2.72

Amazon 0.84 Dangdang 2.12

Others 8.92

Others 17.94

Source: A. Damodaran, Musings on Market, Alibaba: A China Story with a profitable ending?, May 8, 2014, http://aswathdamodaran.blogspot.sg/2014/05/alibaba-china-story-with-profitable.html, accessed June 16, 2014.

EXHIBIT 2: DUAL-CLASS FIRMS IN S&P 1500 COMPOSITE (SELECTED)

Name Index Industry Ownership AMC Networks Inc. S&P 400 Media The Dolan family controls the Class B shares, which

are entitled to elect a majority of the directors. Berkshire Hathaway Inc. S&P 500 Insurance Class A: 1 vote; Class B: 1/10,000 of a vote. CBS Corporation S&P 500 Media National Amusements owns approximately 79.1% of

the voting stock. Comcast Corporation S&P 500 Media The Roberts family controls a non-dilutable one-third


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