The Chinese government in late 2014 said that it would reduce bureaucratic barriers to foreign M&A as part of its Go Global policy aimed at encouraging Chinese companies to expand abroad. This regulatory change has had the intended effect, fuelling outbound investment by China-based companies. Take Ant Financial, the financial services affiliate of and spinoff from e-commerce group Alibaba. Ant agreed last month to invest $200m in Kakao Pay, a mobile payments subsidiary of South Korea-based mobile lifestyle services company Kakao.
The Kakao Pay investment is the latest in a string of foreign deals that Ant has announced in recent months, and highlights the strategic importance of corporate venturing for Ant as it looks to expand its core business and enter new markets in other parts of Asia.
Before analysing Ant’s strategy, it is worth delving into Ant’s origins to understand its continuing business relationships with former parent company Alibaba.
Ant started out as a third-party payment platform called Alipay created by Alibaba in 2004 to operate its e-commerce payment services. Alibaba relinquished all of its interest and control in Alipay in 2011, in preparation for a New York Stock Exchange listing in 2014, the year that Ant Financial Services Group was established. Alibaba could not retain a direct stake in Ant after the NYSE listing because the Chinese government places restrictions on foreign ownership of Chinese financial institutions.
Ant’s mission is to offer inclusive financial services to small and micro enterprises as well as individual customers. In addition to managing its core business Alipay, which has over 450 million registered users, Ant runs a wealth management app and provides credit reporting, private online banking and cloud computing services.
Though no longer owned by Alibaba, Ant – which is controlled by Alibaba founder Jack Ma – still supplies payment services and financing products to Alibaba sellers, and under a 2014 profit-share agreement, Alibaba currently receives 37.5% of Ant’s pre-tax income. Ant and Alibaba are also joint venture partners in Koubei, a listings platform for local services and businesses such as restaurants, travel agencies, hotels and shops.
Ant’s multi-pronged approach to corporate venturing
Corporate venturing plays a significant role in Ant’s strategy to “go global” and grow Alipay’s customer base from 450 million to 2 billion within 10 years.
First, Ant is moving into major markets that are among China’s biggest trading partners, such as South Korea. Second, Ant is investing in fintech and e-commerce companies in Asia and around the world whose businesses could serve to bolster or broaden Ant’s existing offerings. Third, Ant is targeting developing economies in Asia, such as the Philippines, where there are local businesses and individuals who lack access to the financial system. These are markets where Ant’s financial inclusion business model, which has already proven successful in China, can be replicated.
Ant’s South Korean expansion
With the Kakao Pay deal Ant gains access to a key market, South Korea, and it is doing so via an enormously popular local platform. Customers access Kakao Pay via Kakao Talk, a mobile messaging service with more than 41 million active users – equivalent to over 97% of smartphone owners in South Korea, the company says. Kakao Pay offers a range of financial services, including online payments, bill payments and remittances, to more than 14 million users in South Korea.
Ant provided the funding as part of a strategic partnership under which Kakao Pay will distribute Ant’s digital financial services locally. This will enable Chinese visitors to South Korea to keep using Alipay while there, and will provide Kakao Pay customers with a wider range of financial services.
More than 34,000 offline and online merchants in South Korea already use Alipay, so the deal further extends Kakao Pay’s reach for local users. The plan is also to enable Kakao Pay customers to pay for goods purchased from Alibaba’s online shopping sites Taobao and Tmall, according to the South China Morning Post, which is Alibaba-owned. Clearly, the Kakao Pay partnership offers strategic benefits both for Ant and its former parent company.
Kakao Pay is using Ant’s investment to launch itself as a separate entity from Kakao.
Ant’s overseas fintech investments
Asian fintech enterprises have attracted significant amounts of investment from corporate venturers in recent years. As shown in the bar chart, in 2016 a record $7.22bn was pumped into fintech startups from the Asia-Pacific region, via 42 rounds involving corporate venturers. The region accounts for 43% of global fintech funding, according to a report by news provider ImpactAlpha.
Ant has been one of the most active investors in fintech corporate venturing in Asia and across the globe. In 2016 Ant Financial acquired a 20% stake in Thailand-based online payment company Ascend Money, as Reuters reported, along with an option to boost its share to 30%. The financial terms of the transaction were not revealed. Ascend, which spun out of conglomerate True Corporation in 2014, oversees online payment service True Money and microfinance and loan provider Ascend Nano.
Ant took part in Singapore-based currency exchange platform M-Daq’s funding round in 2015, according to Tech in Asia. Though no details were provided, it appears likely that Ant was the unnamed strategic investor that led M-Daq’s $87m series C round in November 2015. M-Daq was founded in 2010 as Summit Investment, and operates a foreign exchange platform to simplify cross-border trading. The company has also launched a dedicated offering for e-commerce, called Aladdin, which aims to make cross-border transactions cheaper for retailers.
Apart from minority investments, Ant’s most sizeable and important acquisition in the field was the purchase of money transfers provider MoneyGram for $880m in late January. As MoneyGram operates roughly 347,000 offices in more than 200 countries, this acquisition gives Ant Financial access to the money transfer market worldwide.
On the e-commerce front, Ant along with Alibaba secured a majority stake in India-based online retail service Paytm E-Commerce following a $200m funding round that was led by Alibaba, the Financial Times reported in March 2017. Paytm E-Commerce, which spun out last year from Paytm, the mobile payment platform owned by e-commerce group One97 Communications, is now valued at $1bn.
Ant and Alibaba previously held a 40% stake in Paytm E-Commerce, but the latest infusion of capital from Alibaba – which committed capital along with investment fund Saif Partners – has given both parties majority control. The additional capital is expected to give Paytm E-Commerce some runway in catching up to market leaders Flikpart and Amazon India. Ant and Alibaba are no doubt hoping Paytm E-Commerce will be able to pull off what Jack Ma achieved in China.
Boosting financial inclusion in the Philippines
Financial inclusion has been at the core of Ant’s vision since its early days as Alipay, and now the company is looking to put that vision to work in other developing nations. Ant’s first investment to date in the Philippines, announced in February, will enable Ant to boost financial inclusion in the country while also working to improve local payment services.
Ant has invested an undisclosed sum to take a substantial minority interest in Globe Fintech Innovations, a financial technology subsidiary of Philippines-based telecoms group Globe Telecom. Globe Fintech Innovations, also known as Mynt, operates micropayments platform GCash and Fuse Lending, a service that offers loans to unbanked and underserved Filipino customers and businesses. Mynt says it is the number-one mobile money provider in the Philippines, with more than 3 million registered customers.
The deal was structured as a strategic partnership between Ant, Mynt and diversified conglomerate Ayala Corporation, which also acquired a minority interest in Mynt. Eric Jing, CEO of Ant, said in a statement: “Ant Financial is committed to building an open, technology-based ecosystem with our partners.”
“We look forward to working with Mynt’s innovative management team to provide simple, secure, low-cost and accessible digital financial services to unserved and underserved individuals and small and micro enterprises in the Philippines.”
If Ant’s foray into the Philippines proves successful, Ant may be tempted to expand into other developing economies in Asia, particularly countries that already have significant cross-border trade with China, such as Vietnam. One way to do so would be via Thailand’s Ascend, since the company also has licences to offer its services in Vietnam, Indonesia, Myanmar, Cambodia and the Philippines.
Looking ahead to Ant’s IPO
As Ant’s first priority is expanding its business, currently valued at $60bn, an IPO may not happen until at least later this year, according to a Reuters report last October that cited sources with knowledge of Ant’s plans.
At home, Ant has been growing its business organically as well as through acquisitions. 58% of all online transactions in China now go through Alipay, according to investment bank Credit Suisse estimates.
And in terms of domestic M&A, Ant has been acquiring stakes primarily in transport and consumer businesses, as illustrated in the bubble chart prepared by GCV Analytics.
Two major deals shown in the bubble chart are ride-hailing service Didi Chuxing and e-commerce company Ele.me, China-based businesses that Alibaba and Ant co-invested in. To fund further investments and acquisitions, Ant is reportedly raising $3bn in debt, having collected $4.5bn in equity and debt in a series B round in April 2016.
Along with China’s other fast-growing internet titans, such as Baidu and Tencent, Ant is building a global footprint, using corporate venturing to expand its presence in Asia.
It is noteworthy that in several deals, such as Kakao Pay, there are strategic benefits both for Ant and Alibaba. True, there is a downside to the complex relationship between Ant and its former parent company – Alibaba said as much in a regulatory disclosure at the time of its IPO, citing its close association with Alipay as a possible business risk. But the upside is that as Ant moves into new markets, potential business partners see opportunities to capitalise on Ant’s relationship with Alibaba as well, and that could prove to be a key advantage.
