The monitoring room is seen at Alibaba.com Ltd.’s headquarters in Hangzhou. Photographer: Nelson Ching/Bloomberg

Sept. 25 (Bloomberg) — Alibaba Group Holding Ltd. is moving toward an initial public offering in the U.S. after talks for a Hong Kong listing broke down following management’s proposal to keep control in a share sale, according to two people familiar with the matter.

China’s largest e-commerce company is seeking U.S. law firms to help with an IPO and hasn’t hired banks yet, said one of the people, who asked not to be identified because the process is private. Alibaba, which investment banks value at as much as $120 billion, is likely to choose to list its shares on the New York Stock Exchange, another person said.

Alibaba founder Jack Ma and partners want to control the Hangzhou-based company after the listing by effectively creating two groups of shareholders, with one group able to nominate a majority of board members. To protect the interests of ordinary shareholders, Hong Kong’s exchange prohibits IPOs with different classes of shares, a structure that has been used by companies from Facebook Inc. to Manchester United Plc in their U.S. initial offerings.

“Jack Ma really insisted on the partnership structure,” said Billy Leung, an analyst at RHB Research Institute Sdn. in Hong Kong. “If you give it to them then you give it to everyone. Alibaba has been waiting for so long, they just said let’s go to the U.S.”

‘Emotional Arguments’

Losing the Alibaba IPO would be a blow to Hong Kong, which hasn’t hosted a first-time share sale of more than $4 billion since October 2010. The exchange is the fourth biggest equity market in the world, with companies trading there worth a combined $3.4 trillion in market value, according to data compiled by Bloomberg.

“We need to look objectively at the issues and not be swayed by emotional arguments or be distracted by specific circumstances of any given company or issue,” Charles Li, CEO of Hong Kong Exchanges & Clearing Ltd. said in a blog post today. He didn’t name Alibaba.

While the Nasdaq Stock Market dominated technology listings in the past, winning everything from Intel Corp. to Facebook, the New York Stock Exchange, or NYSE, has established itself as a challenger in the most recent wave of offerings. Since mid-2011, LinkedIn Corp. Pandora Media Inc. and Yelp Inc. have listed there, and Twitter Inc. is also leaning toward the NYSE, a person with knowledge of the matter said this week.

Alibaba declined to comment in an e-mail today. Lorraine Chan, a spokeswoman for Hong Kong Exchanges, declined to comment, citing a company policy against discussing individual cases. NYSE Euronext spokesman Rich Adamonis also declined to comment on Alibaba’s IPO plans as did William Briganti at Nasdaq OMX Group Inc.

Partnership Control

Alibaba may appoint underwriters by the end of this year, one of the people familiar said. While a final decision hasn’t been made, the company may use a partnership structure similar to what it proposed in Hong Kong, the person said.

For weeks, Alibaba and the Hong Kong exchange discussed the proposal to let partners control most board nominations. That would let Ma, a former English teacher who owns 7.4 percent of the stock, and his managers run the company without worrying about being pushed out by an activist investor with a different strategy, a person familiar with the matter said last month.

The company had 28 partners as of Sept. 10, Ma said in an e-mail to employees this month. They include co-founder Joseph Tsai and Chief Executive Officer Jonathan Lu.

Investor Rights

Under Alibaba’s partnership proposal, all shareholders would still vote on the proposed directors with partners being able to nominate an alternate if shareholders reject a candidate, the person familiar with Alibaba’s thinking said.

No other investor rights would be changed, the person said. Deals involving company executives, major expenses and compensation would be voted on by all shareholders, according to the person.

“This is not a mere profit sharing mechanism, nor is it a vehicle of power to exert greater control over the company,” Ma said in the Sept. 10 e-mail.

Hong Kong’s bourse doesn’t allow share classes with different voting rights, as exchanges in the U.S. do. Under Hong Kong’s listing rules, new applicants must not include shares whose voting power doesn’t bear a “reasonable relationship” to the equity interest.

Manchester United

The dual-class structure helped Facebook’s Mark Zuckerberg and Google Inc. co-founders Larry Page and Sergey Brin keep control of their companies after they went public. Manchester United, the English soccer club, also considered a share sale in Hong Kong before eventually settling on the U.S. where Class B shares owned by the Glazer family carry 10 votes apiece versus one vote each for the Class A shares sold in the IPO.

“They can go to the U.S. and accept the U.S. environment with more stringent reporting requirements and a class action litigation system and benefit from the dual-class voting structure,” said David Webb, founder of local governance watchdog Webb-site.com and a former director of the exchange.

Ma started Alibaba in his Hangzhou apartment in 1999 with two dozen items for sale, and the company’s expansion mirrors China’s emergence as an economic superpower. The company now has 24,000 employees and generates about 70 percent of package deliveries in China. Customers bought at least 1 trillion yuan ($163 billion) of goods via Alibaba last year.

That success has made Ma, 49, one of China’s richest people with an estimated net worth of $3.7 billion, according to the Bloomberg Billionaires Index.

There is still room for growth. China has 591 million Internet users, greater than the population of any other country except India, and McKinsey & Co. estimates China’s Internet retail market will triple to $395 billion from 2011 to 2015.

Alibaba’s Valuation

In a July 17 report, Evercore Group LLC estimated an Alibaba IPO could value the company at $120 billion, based on a forecast that operating profit could reach $7.1 billion in 2014. Goldman Sachs Group Inc. on July 22 put Alibaba’s value at about $105 billion.

At $120 billion, Alibaba would be the third-biggest Internet company behind Google and Amazon.com Inc. based on market capitalization.

Alibaba could raise about HK$100 billion ($12.9 billion) in an initial sale, Ernst & Young LLP said June 28. That would make it the world’s biggest IPO since Facebook raised $16 billion in May of last year, and Hong Kong’s largest since AIA Group Ltd.’s $20 billion sale in October 2010, according to data compiled by Bloomberg.

The IPO of Facebook valued the company at $104 billion, and the shares lost as much as half their value in the first few months of trading before starting to recover.

Yahoo, SoftBank

Alibaba is considering a more conservative valuation than Facebook for its IPO, a person with knowledge of the matter said earlier this year.

Alibaba’s profit in the latest quarter tripled from a year earlier to $669 million, Yahoo! Inc. said in July. Facebook earned $217 million in the same period and Tencent posted net income of 4.04 billion yuan.

Japan’s SoftBank Corp. owns about 37 percent of Alibaba and Yahoo about 24 percent, the companies said separately in July. Hiroe Kotera, a Tokyo-based spokeswoman for SoftBank, declined to comment today about Alibaba’s IPO plan.

After starting as a business-to-business marketplace on Alibaba.com, where companies trade anything from shoelaces to steel, the company has morphed into a more consumer-focused operation. Its most popular platforms include Taobao Marketplace, which links individual buyers and sellers, and Tmall.com, which connects consumers to companies such as Microsoft Corp. Procter & Gamble Co. and Japanese clothing chain Uniqlo.

To contact the reporters on this story: Lulu Yilun Chen in Hong Kong at ychen447@bloomberg.net ; Jonathan Browning in Hong Kong at jbrowning9@bloomberg.net

To contact the editors responsible for this story: Michael Tighe at mtighe4@bloomberg.net ; Philip Lagerkranser at lagerkranser@bloomberg.net