|An alternative, very plausible, take on Ant:|
Pulling Ant's IPO might have been the right move
November 6, 2020
When Ant Group's IPO was pulled by the Chinese government on Tuesday, all eyes — including mine — immediately went to Jack Ma's speech from a week earlier, in which he publicly criticized China's financial regulation. The suspension looked like a clear act of retaliation: China was showing Ma who's really boss. And that explanation certainly holds some truth.
But the reality is likely much more complicated. "I can't quite believe that [regulators are] so petty that they suspended the IPO simply because of Jack Ma's angry speech," Fraser Howie, co-author of "Red Capitalism," told me this morning.
Tanking a listing that was set to bring a lot of positive attention to China can't have been an easy decision to make and it's hard to believe that it's a decision made solely out of spite.In fact, Howie suggested, Chinese authorities may have decided it was in fact necessary to step in to save investors' skin.
To understand what's really going on, it's important to look at draft regulations that China had been planning for weeks and finally published on Monday. Under the proposed rules, online lenders like Ant would have to make at least 30% of their loans themselves, rather than outsourcing them to other companies. That compares to a roughly 2% requirement today.
The change could have a huge impact on Ant's balance sheet: The Financial Times cites one anonymous expert who thinks Ant would need "an extra $20 billion or so in capital reserves" — more than half the amount Ant was set to raise. Another said the impact could be so big that Ant's valuation halves.
Ma apparently knew all about these new rules, even though they were only made public Monday. The FT reports that at the time of his speech, Ma was privately discussing the rules with regulators. And people across the fintech industry knew regulation like this was inevitable. "They did not write these regulations … [in] three days," Howie said.
So Ant appeared to know that huge rule changes were coming that would totally change its business, and it said … almost nothing. Its IPO filing does not describe the proposed changes in much detail, while Reuters reports that the company did not tell investors about the changes during its roadshow.Ant executives "were presenting a picture of themselves which was not going to be a good representation of their business going forward," Howie said.
All that raises a big question: Was Ant trying to list before these new rules came into effect in an effort to achieve a higher valuation?
If that was the case — a big if! — then it suddenly becomes much clearer why regulators intervened to stop the listing. "If the company had listed, and then they changed the rules and you had this dramatic collapse in Ant's share price," Howie said, "the question that would have been asked is 'Why didn't the regulators do something earlier?'"Pulling the listing may have been embarrassing, but maybe not pulling the listing might have been even more embarrassing.
The upshot? While some think the pulled listing might hurt investor demand for Chinese shares, the opposite could be true. "I don't want to give Chinese regulators too much credit," Howie said, "but I also don't want to just dismiss out of hand the fact that they've probably done a lot of investors a service."
We'll know for sure if they have been helped when Ant eventually returns for round two. If it ends up going public at a much lower valuation, investors might find themselves grateful — albeit at Jack Ma's expense.