Commentary: Are stars aligning for Grab’s listing? What will happen the morning after?
The SPAC market is picking up and investors are looking for equity options. But Grab faces regulatory pressures on gig workers and intensifying competition. Fintech remains a murky sector too, say business academics from NUS and HKUST.
SINGAPORE/HONG KONG: In early April, Southeast Asia’s “everyday-everything” super app Grab announced its intention to go public through a merger with Altimeter Growth (AGC), a Special Purpose Acquisition Company (SPAC).
It would be the largest SPAC merger globally and the largest equity offering in the United States by a Southeast Asian company, aimed at raising around US$4.5 billion in cash proceeds on the back of a whopping US$40 billion valuation.
The SPAC market was bullish then. But the US Securities and Exchange Commission (SEC) crashed the SPAC party in late April after announcing new accounting rule changes.
A series of scandals further dampened investor appetite for SPACs. This shorter and less arduous road for Grab to become public, compared to traditional IPOs, was suddenly infused with uncertainty.
Fast forward six months. The SPAC party seems to be springing back to life as regulatory filing backlog clears up.
In the last few weeks, several SPAC mergers, including those of space-leasing company WeWork, self-driving vehicle company Aurora, and social networking app Nextdoor, pushed past the finishing line.
Last week, the SEC gave the green light to the proposed merger between AGC and Grab. With an Extraordinary General Meeting of AGC shareholders to approve the merger coming up on Tuesday (Nov 30), it looks like Grab’s transformation into a public company is imminent.
THE STARS ARE ALIGNING
This couldn’t come at a more opportune time for Grab. Enthusiasm for SPAC mergers is recovering at the moment, and tech stocks in particular remain hot.
While some investors might still be wary of highly valued growth stocks, Grab presents a good option for those seeking exposure to Southeast Asia tech markets. Investors seeking alternatives to mainland Chinese stocks amid the ongoing tech clampdown there might also look towards Grab favourably.
The twentyfold stock price appreciation of e-commerce giant Sea Limited since its IPO in 2017, has also affirmed the potential of the under-represented Southeast Asia market. Grab is the next big tech unicorn from this region, and it might benefit from these supportive trends.
Furthermore, with pandemic restrictions easing up in Southeast Asia, the prospects of recovery in the major markets Grab operates in will help to bolster investor’s confidence in Grab. That is if the recent emergence of COVID variant Omicron, which spooked the financial markets last Friday, doesn’t derail the region’s easing up plans.
Waiting can be costly for Grab. The SPAC financing structure is still under scrutiny, with more regulatory changes and a greater focus on transparency expected.
There are also rising concerns and mounting pressures for regulations around the rights, protections and legal status for platform workers. Expected new constraints in the form of regulatory changes in the near future can have adverse effects on Grab’s fundamental cost structure.
The SPAC-merger route remains Grab’s most viable option to becoming a public company in the short term. Missing this window could thwart Grab’s ambition to become public at an impressively high valuation.
THE MORNING AFTER: WHAT NEXT AFTER GRAB LISTS?
The current timing for the SPAC deal may be advantageous for Grab, but what can we expect the morning after a night of aligned stars?
Let’s imagine everything proceeds smoothly. The SPAC-merger has completed successfully. Grab is now a proud, highly valued public company. At the current trading price of AGC at about US$13, Grab’s estimated market cap would be around US$50 billion (based on the filing to the SEC on the expected number of shares to be issued upon merger).
Grab has not been profitable. It reported a US$2.75 billion loss for the year of 2020 and US$1.47 billion loss for the first six months of 2021.
Putting aside whether this valuation is a true reflection of the intrinsic value of Grab, it means Grab has to deliver stellar performance to meet the high expectations of its investors.
As a public company, Grab will be subjected to myriad mandatory financial regulatory disclosures. Normally, firms get a good dress rehearsal during the IPO process and some don’t list because they do not survive the scrutiny.
The SPAC-merger route cuts that out. After going public, Grab would be periodically subject to close scrutiny.
In its critical transition from a private venture into a highly valued public company, Grab must pay attention on several fronts.
STRENGTHENING THE BOARD OF DIRECTORS
Grab needs a more diversified board of directors to strengthen its corporate governance and oversight. Just four outside directors (out of six) seem inadequate for such a highly valued company, not to mention Dara Khosrowshahi is CEO of Uber, a key shareholder.
Since the CEO of Grab is expected to retain a disproportionately large total voting rights (about 66 per cent), further fortification of the board would be necessary for oversight reasons.
Boards are important for insight too. Grab wants to dominate the 670 million citizens of Southeast Asia. This sounds impressive.
But Southeast Asia is fragmented and navigating Indonesia or Philippines is much more difficult than Singapore. Uber experienced it first-hand and left the region. The board must bring rich and informed understanding of these diverse, developing Asian markets to the table.
It is crucial to not only bring in additional independent directors with high and suitable human and social capital, but also to correctly organise the formal board leadership structure so that these directors are effective.
One way is to ensure that the most qualified directors are appointed to the board chair and committee chair positions. Otherwise, director feel slighted and an overall dysfunctional climate ensues, a situation we call “board undervaluation”.
Our research shows that board undervaluation can be the Achilles’ heel in newly public firms.
Few leaders pay as much attention due to all the excitement and busyness at the time of going public, but board undervaluation can cast a long shadow on many strategic outcomes that impact investors, including director (and CEO) turnover, new director recruitment, earnings management, and firm innovation.
Grab, and its investors, should be mindful.
What are the implications of making food deliverers full-time employees? Grab Singapore's Managing Director Yee Wee Tang explains the impact for the business and consumers on CNA's Heart of the Matter podcast:
INNOVATING ITS SUPER APP
Margins for food delivery and ride-hailing are thin, so a key element of Grab’s path to profitability banks (no pun intended) on fintech.
Its stated strategies around fintech are not sufficient to show strong growth, as competition and regulatory changes are afoot in Southeast Asia. Despite the initial investor euphoria and positive press, digital neo-bank darlings like N26 and Monzo are stumbling in the US and Europe.
Research also suggests internal innovation usually sags in newly public firms, and external acquisitions are relied upon for rapid growth and expansion. Grab would thus have to actively seek out gems in the region to integrate into its super app ecosystem.
This expansion won’t come easy given few acquisition options in the region to help fuel innovation, and Southeast Asia’s heterogenous regulatory, political and economic environment.
The deal fallout with Gojek suggests rivalries awaits Grab in the region. Competition will intensify if Uber and Didi enter the region upon the expiry of their respective non-compete agreements.
Furthermore, Grab’s super app strategy will have to meet stringent data privacy rules.
MANAGING PLATFORM GIG WORKERS
Then there’s many key stakeholders to manage. Platform gig workers are central to keeping Grab’s two main operations of ride-hailing and food delivery running. They are highly visible – and if not managed well, will cease to be ambassadors of the company.
To the extent that Grab considers them dispensable – with its management attention increasingly on fintech – it may unintentionally sow seeds of discontent for other products such as financial services for the underbanked.
Grab’s recent initiatives, such as the GrabforGood Fund, aim to improve the quality of life for its drivers and the broader community, and the intent is generally in the right direction.
The success of such support programmes is necessary in keeping its key stakeholders happy and engaged. Yet, there is financial cost associated with these programmes, and imitation by competitors can reduce their effectiveness.
Despite these important challenges that Grab will face as a public company, there is a significant opportunity to provide a suite of digitally enabled services now commonplace in China and the US, for Southeast Asia. The question is whether Grab can achieve this feat despite its scale, valuation and visibility.
If Grab manages to fire correctly on all its cylinders, it could continue to be an investor darling.
But for now, as much as one adores the aligned stars coming into focus for Grab, it is still prudent to scrutinise the SPAC merger and afterlife under a healthy dose of sunlight.
Dr Hanny Kusnadi is deputy academic director of the MSc (Accounting) programme and a Senior Lecturer in the Department of Accounting at NUS Business School. Dr Sam Garg is the Liwei Huang Associate Professor of Business (Strategy and Entrepreneurship) in the Department of Management at HKUST Business School in Hong Kong. These are personal views of the authors.