In September 2014, Alibaba went public and had the largest IPO of all time. The company raised $25 billion for itself and investors. Alibaba ended the day with a market cap of $230 billion. That market cap is roughly $70 billion higher than most analysts predicted. The IPO made company founder Jack Ma the richest person in China and one of the 30 richest people on the planet.
With such a sensational debut, the combination of Alibaba and Jack Ma are drawing comparisons to Microsoft and Bill Gates. Some analysts go so far as to predict that Alibaba will be just as revolutionary to the proliferation of global commerce as Microsoft was to the proliferation of personal computers, roughly 30 years ago. Gates' PC revolution turned him into the richest person on the planet. That's a crown he has held for the better part of 15 years, minus a handful of Carlos Slim years. So that got me thinking. What happened on the day Microsoft went public? Was it as sensational as Alibaba? Did Bill Gates finish the day as one of the wealthiest people on the planet? Did Microsoft earn a market cap in the hundreds of billions? The answers may surprise you.
A Brief Early History of Microsoft:
Microsoft was founded by childhood friends Bill Gates (aged 20) and Paul Allen (aged 22) in Albuquerque, New Mexico on April 4, 1975. Yes that's right, Albuquerque. Not Seattle. The reason the company was founded in Albuquerque is because it happened to be the hometown of a company called Micro Instrumentation and Telemetry Systems (MITS). In January 1972, Popular Electronics Magazine did a feature on MITS' latest invention, the Altair 8800 microcomputer. After seeing the article, Paul Allen convinced Gates to leave Harvard and write an operating system for the Altair. Executives at MITS were impressed and hired the young duo to create official software for the company. And with that, "Micro-Soft" was born.
Four years later, in January 1979, Microsoft set up shop in Seattle (hometown of both Allen and Gates). The Gates and Jobs teams were totally blown away by the concept. Unsurprisingly, both teams returned to their campuses and set out to develop GUI based operating systems.
Within a year, Microsoft announced a partnership with IBM to develop a GUI operating system that would be standard for all IBM computers. This operating system soon became known as MS-DOS. In what might be the most brilliant move in business history, instead of selling the rights to MS-DOS directly to IBM, Gates opted to license the software. By doing this, Microsoft retained ownership of MS-DOS and could therefore license it new customers. Imagine if whoever invented the car engine decided to license the engine instead of selling it outright to Ford. Then, as every person in the world bought a car, the inventor would have made an unimaginable fortune. That's what happened with Microsoft. As the PC revolution exploded around the world, MS-DOS became the standard for pretty much every computer that was built. And every time someone bought a PC, they were also forced to buy a MS-DOS license from Microsoft.
When Microsoft officially incorporated in 1981, Steve Ballmer owned 8% of the company, Paul Allen owned 25% and Bill Gates owned 45%. The remaining 22% was split up among some of the luckiest people ever to join a risky young startup.
"The Graphical User Interface"
At some point in 1983, Xerox developed a revolutionary operating system that connected the PC's mouse to the computer screen. For the first time ever, a human could move his or her hand, and the mouse would follow. Point, click. Drag, drop. It was originally called the "graphical point and click interface". More commonly known now as the "graphical user interface" (GUI or Gooey). This little innovation is still the standard in every computer to this day.
For some insane reason, Xerox invited executives from both Apple and Microsoft to check out what they had created. Within a matter of months, both companies were working on their own operating systems that had graphical, point and click mouse interfaces. When Steve Jobs learned that Microsoft had also created an operating system based on Xerox's innovations, he was furious. He demanded Bill Gates come to Apple's headquarters and account for his actions. Here's how that interaction went down in an Apple conference room:
Jobs screamed: "You're ripping us off! I trusted you, and now you're stealing from us!"
Gates sat coolly on the other side of the conference room while Steve unloaded his fury. When the Apple founder was done, Gates replied:
"Well, Steve, I think there's more than one way of looking at it. I think it's more like we both had this rich neighbor named Xerox and I broke into his house to steal the TV set and found out that you had already stolen it."
Microsoft Windows was released on November 20, 1985. Within a matter of months, the PC became the global computing standard and subsequently pushed Apple to the wayside for more than a decade. And every time a PC was sold, Microsoft earned a fat royalty check for its software. Over the next several months, Microsoft would slowly gain a number of new private investors. And according to Securities and Exchange Commission regulations, once a company has more than 500 private shareholders it must go public. Therefore an IPO was inevitable, even though Bill Gates would have preferred to stay private.
The day before Microsoft's IPO, Larry Ellison's Oracle Corp had its own IPO. Oracle planned to offer 2.1 million shares at $15. By the end of its first trading day, Oracle shares sat at $19.25. This was seen as a very positive sign by the bankers guiding Microsoft's debut, so MSFT's opening price was raised from $16 to $21.
At 9:35 am on March 13, 1986, MSFT opened at $25.75 per share. Goldman Sach's CEO could be heard on the trading floor shouting "It's wild! I've never seen anything like it — every last person here is trading Microsoft and nothing else!"
By the end of trading, 3.6 million MSFT shares had been exchanged and the stock price (having peaked at $29.25) ended the day at $27.75.
So how much were Gates, Allen, and Ballmer worth after their smash hit IPO? $10 billion? $20 billion? $50 billion? $100 billion???? Nope, nope, nope and nope. Microsoft ended the day with a total market cap of $780 million. Gates' 45% stake was worth $350 million. Allen's 25% stake was worth $195 million. Ballmer's 8% stake was worth $51.5 million.
That's right, Bill Gates was worth "just" $350 million after the Microsoft IPO. What's even crazier is the fact that he personally only sold $1.6 million worth of shares on opening day. Bill, who was in Australia on vacation the day the company went public, would eventually use $150,000 of his IPO earnings to pay off the mortgage on his Seattle house. Paul Allen, who was at least actually in Seattle on IPO day, told a local paper that he was "very happy" and "might go out for some champagne later to celebrate". What a couple of maniacs!
Predicting the Future
Times have certainly changed in the tech IPO world over the last 30 years. After its IPO in 1986, Microsoft was worth $780 million. After its IPO, Alibaba was worth $230 billion. Bill Gates sold $1.6 million worth of his Microsoft shares on his IPO day. Jack May sold $1.1 billion worth of his BABA shares the day it went public.
Here's what happened to Microsoft in the 30 years since it has been a public company.
Microsoft (both the company and the stock price) grew at an unbelievable pace after going public. If you had invested $10,000 in Microsoft back in March of 1986, today you'd be sitting on around $8 million dollars.
In 1985, Microsoft's total revenues were $140 million. So when the company went public in March of 1986, its $780 million market cap was a multiple of 5.5 times its previous year's earnings. In 2013, Alibaba earned $7.5 billion in revenue. So at today's $230 billion market cap, the company is trading at a multiple of 30 times previous year's revenues.
If Jack Ma wants to surpass Bill Gates and Jeff Bezos to become the richest person in the world (and assuming Gates' and Bezos' net worths stay around $90 billion), Alibaba will have to increase in value 3.3X and have a minimum market cap of $760 billion. Baba's current market cap is around $460 billion. FYI, Apple is the most valuable company in the world right now with a market cap of $900 billion. So it's a big challenge. Not an impossible challenge. Just a big one.