Ant Group: From the World’s Biggest Stock Listing to 'Donezo' – 72 Chaotic Hours
Ant Group Co. Ltd’s would-be world record IPO, and subsequent development in China’s fast-growing capital markets, has been called off. Just days before the fintech giant Ant Group was to make a $37bn share sale, China drastically put the brakes on the massive IPO and has delayed it until further notice. Chinese authorities cited “major issues” as the reason behind the eleventh-hour suspension, while comments made by Ant’s owner, Jack Ma, on the use of data for lending decisions may have set off alarm bells for Chinese officials. How did Beijing block Ant Group’s IPO, and what does this mean for the fintech giant?
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A walkthrough: What is an IPO?
An Initial Public Offering, often referred to as IPO for short, is the process through which a private corporation offers shares to the public in a new stock issuance. This is usually used as a tactical move to raise capital from public investors. This allows for public investors to participate in the offering, and it is often seen as an exit strategy for the company’s founders and early private investors to realise a full profit from their investments before going public.
Alibaba Group, which holds a 33% equity stake in Ant Group and shares its common founder Jack Ma, has similarly seen a large IPO which raised $25 billion in 2014. Notably, following Ant’s IPO suspension announcement, Alibaba saw its share prices plunge by 9.6% in Hong Kong trading and 8.1% in New York, an approximate $76bn value haircut.
The public market opens up an opportunity for millions of investors to buy shares in the company and contribute capital to a company’s shareholders’ equity. Importantly, an IPO consists of two limbs – first is the pre-marketing phase of the offering, where it will advertise to underwriters who lead the IPO process and are chosen by the company. The underwriters manage different parts of the IPO process, present proposals and valuations, the best type of security to share, the offering price, and are generally involved in the due diligence, document preparation, filing, marketing and issuance. The second limb is the IPO itself.
Companies need to meet the requirements set by exchanges and the Securities and Exchange Commission (SEC) (in the US) to hold an IPO, on an almost ‘prepped and primed’ basis. In the UK, the process involves an application to the Financial Conduct Authority (FCA) for admission of a company’s securities to the Official List, and an application to a recognised investment exchange, such as the Main Market of the London Stock Exchange. All jurisdictions have securities laws enacted to protect investors.
Did you know? - WeWork's IPO
The main reasons for WeWork’s failed IPO in 2019 were the company’s massive losses ($2.1bn), its high-risk business model, poor corporate governance and poor valuation. All of these are factors taken into consideration before an IPO is approved.
Ant Group: a fintech giant
Ant runs Alipay, which is one of the main online payment systems in China and has eclipsed cash, cheques and credit cards. Ant acts as a high-tech matchmaker between banks and borrowers. It has been described as a “digital supermarket”, letting users buy on credit, invest in mutual funds, and matches users with financial firms’ loan, wealth management and insurance offerings.
At the end of June 2020, Alipay had served 711 million monthly active users, and its app processed 118 trillion yuan ($17.4 trillion). In terms of the IPO, banks like China International Capital Corp have been relying on huge windfalls as part of the fees from the record-setting IPO.
Morningstar Inc estimates that Ant has $271bn in consumer loans outstanding, while it will have to hold $81bn in loans on its balance sheet. Morningstar has also estimated that new regulations imposed by Beijing may force Ant to raise more capital to back its lending, and seek national licenses in order to operate across the country, which would, in turn, slash the firm’s valuation by approximately half.
These will reportedly force the payments company to rethink its business model so that its business model projections change. The regulations include control on micro-lending, one of the company’s biggest business drivers, which meant that Ant no longer met “listing conditions or information disclosure requirements”. Such change could make the fintech giant more akin to a bank, a sector which is highly regulated as opposed to the lax screening fintech companies currently face.
The suspension will cost underwriters millions in fees, while a new IPO prospectus could take months to file. Was the stock unfairly punished?
Shanghai Stock Exchange suspended the listing on Tuesday 3rd of November, just a day after Beijing had announced draft regulations to control financial risks and further protect consumers’ rights and interests. The rules require internet platforms to provide at least 30% of the funding of their loans and to cap loans at $44,843, or if lower, at a third of a borrower’s annual salary. Ant funds only 2% of its total loans, with the rest coming from other sources such as banks.
No matter how revolutionary a company may be, if it is operating in China, it still needs the blessing of Chinese regulators. In this case, the Chinese authorities called in Ant’s executives and owner Jack Ma, to discuss regulation of the sprawling fintech firm. The Chinese government may have also had concerns with some comments Jack Ma made last month, comparing traditional banks to “pawn shops” with their collateral standards, and instead praised the merits of the digital banking system. He made the statement that future lending decisions should be based on data and not collateral.
Ant group collects vast amounts of data from its consumers, over which the Chinese government does not have immediate access to, but which it could request. Beijing expects a level of control over Chinese companies, and in this case, Ant Group may have been seen as increasingly escaping out of the government’s circle of control. Both Tencent’s Tenpay and Alipay have held a near-duopoly in China’s digital payments market, and the power to disrupt the country’s mostly state-backed banking sector.
The bottom-line? Alibaba may be facing potential antitrust probes regarding its leading position in China’s e-commerce market, and the suspended IPO may have disrupted the market’s appetite for future offerings.
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