The Ant that Poked the Dragon
Tippets by Taps #153: Did Jack Ma want to halt Ant Group’s IPO?
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"The difficulty of tactical maneuvering consists in turning devious into the direct, and misfortune into gain." - Sun Tzu, The Art of War
Jack Ma finally did it. The richest man in China went too far.
He poked too hard.
He walked his colony of Ants right under the magnifying glass and got burned.
Or at least that’s the story he wants you to believe.
Ant Group is a financial services behemoth and the largest privately-held company in the world. It has over a billion users and 80 million merchants using its services across 200 countries. The platform processes over $18 trillion a year in payment transactions, making it bigger than Visa and Mastercard combined. The lending arm has lent over $300B to both consumers and SMBs. A big business ready for a big IPO.
Ant was scheduled to go public on November 5th, 2020; the $37 billion offering was to be the largest in history. The company was projected to have a market cap of over $300 billion, making them more valuable than most global banks. The demand for IPO shares was so high brokerages were holding lotteries to determine who would have the “once-in-a-lifetime opportunity” to buy in.
The IPO was also notable for where the shares were going to list. Spurning the major US exchanges, Ant opted to list in both Shanghai and Hong Kong. A Chinese tech giant, going public on Chinese exchanges, minting a new crop of Chinese millionaires and billionaires meant a major Chinese victory all around.
Then, a chain of events unfolded that derailed this runaway money train.
On October 24th, twelve days before the IPO, Jack Ma, the outspoken founder of Alibaba and majority owner of Ant Group, strode on stage at the Shanghai Bund Finance Summit for a speech. In front of Chinese regulators, politicians, and bankers, Ma poked the Dragon, openly criticizing the Chinese government and banking system.
“...the problem in China…is not a problem of systemic financial risk, because China's financial sector basically doesn’t have a system. Its risk is actually a "lack of financial system...We must change the pawnshop mentality of today's finance and rely on the development of a credit-based system...today's banks continue to have a pawnshop mentality.” - Jack Ma, Shanghai Bund Summit, October 24, 2020
The full transcript of the speech can be found here. I encourage you to read it in its entirety.
The subsequent sequence of events follows the plot of a teen drama. After being publicly criticized, jilted regulators stewed for a week before convening to figure out how to show Jack and Ant who’s boss. With the express mandate of Chinese President Xi Jinping, regulators aimed at Ant’s most profitable business: lending. They released draft regulations that would require all online lenders to fund at least 30% of any loan they issue. For context, Ant currently funds 2% of these loans themselves, relying on Chinese banks to service the rest. This change fundamentally alters Ant’s business model.
The government released the draft regulations on November 2nd, a mere two days after the first meeting. The Shanghai Stock Exchange pulled the plug on the IPO on November 3rd, citing the changes in the regulatory environment and a “desire to protect investors.” No IPO for Ant, no celebrations for Jack Ma, and a message sent loud and clear to Jack and anyone else who might think themselves above the Party: stay in line or else.
The story fits a narrative we’ve seen before. An entrepreneur’s vision of the future is at odds with the status quo perpetuated by an out-of-touch government. The entrepreneur speaks out against regulators. The government, in an effort to maintain authority and control, changes the rules of the game.
It makes sense and is a likely story. But what if something else is afoot?
If you’re Jack Ma, one of the richest people on the planet, you are in the business of information. It is your job to be in the know, in the room where it happens. Through either soft or hard power, you submerge yourself in the flow of information and access. This allows you to influence outcomes, make informed decisions, and, perhaps most importantly, avoid any and all surprises. The government dropping major new regulations that fundamentally impact your business qualifies as a big surprise. What happened?
As the story stands, Chinese regulators, finally pushed past the breaking point by Jack’s speech, spent a mere two days secretly drafting regulations specifically targeting Ant’s profit center. Given governments are, by design, slow-moving, this feels like a bit of a stretch to me. Gathering all the relevant stakeholders, drafting, and releasing this type of far-reaching regulation in two days? And in so doing, preventing a major Chinese victory on the global stage? All over a few lines in a speech?
What if, instead, the government was already working on regulatory changes targeted at Ant? What if these changes, initially scheduled for release after the company went public, were accelerated after Jack’s crack about China not having a financial system?
I think there was already targeted regulation in the works, and I think Jack Ma knew about it ahead of the conference. Introducing Jack at the event, the conference host said, “He says he came to the Bund Summit today to throw a bomb.” I think Jack wanted to halt the IPO.
A stalled filing might seem like the worst possible outcome for Jack and Ant. However, consider what would have happened if the company had gone public as planned. The company would have had a history-making IPO with a stock price heading for the moon. In come regulators, raining fire from the sky with new rules that cripple a core part of the business. The stock tanks as skittish investors flee the flames. Now, with a market cap cut in half, everyone is looking at Jack (despite him having retired from Alibaba and not having any formal role at Ant Group) asking, “Why didn’t you do anything?”
Jack is no fool. He knows stalling the IPO meant the company has the ability to adjust to the new business (and regulatory) environment in private. No public market scrutiny. No quarterly earnings expectations. No need to allay investor concerns. Not to mention, Ant benefits from playing into the prevailing narrative discussed earlier: the Chinese government has declared war on the private sector to further exert Party control. Put simply, Ant good. Government bad. And while Jack’s reputation takes a short term hit, he has always been building for the long term.
If Jack knew the rules were coming, he also knew he needed to do something to force the party’s hand and create the necessary conditions to withhold the IPO. He poked the Dragon.
Only time (and many legal battles) will expose more of what really happened in the days and weeks leading up to the conference and eventual pausing of the largest IPO ever. Ant will eventually make its way into the public markets after making nice with the regulators behind closed doors. Jack Ma will still be Jack Ma. And while we might never know the full story, one thing is for certain: there is more to the tale of the Ant and the Dragon than meets the eye.
For more on Ant, you might enjoy the below:
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Thanks to Nisha T., Chris D., Tom W., Nick V., Racha G., N.D., Nitish M., Linus L., and Z.C for reading drafts of this essay.