3 reasons why Grab is going public with a SPAC vs. a traditional IPO

April 14, 2021, 12:39 PM UTC

Our mission to make business better is fueled by readers like you. To enjoy unlimited access to our journalism, subscribe today.

Grab Holdings, Southeast Asia’s most valuable startup, announced Tuesday that it will go public by merging with a New York–listed special purpose acquisition company (SPAC) controlled by Altimeter Capital Management, a Silicon Valley group known for investing in late-stage technology companies.

The deal will raise $4.5 billion in cash and will value the combined entity at nearly $40 billion—making it the largest SPAC merger ever.

But the alliance is noteworthy for more than its size. Grab is one of the world’s most promising unicorns. Launched from a gritty warehouse in Kuala Lumpur, Malaysia, in 2012 as an Uber-inspired taxi-hailing service, the company has metamorphosed into an “everyday superapp” that now provides a host of services—including food and package delivery, digital payments, insurance, and even health care—to hundreds of millions of customers in more than 350 cities across eight countries. Grab’s venture investors include heavyweights like SoftBank Group, Didi Chuxing, Microsoft, Mitsubishi UFJ Financial Group, Toyota Motor, and Uber Technologies.

Subscribe to Eastworld for weekly insight on what’s dominating business in Asia, delivered free to your inbox.

So it was a surprise to many that such a high-flying startup would chose to go public via a “blank check model” that involves raising money for a shell company, listing the shell company, and then using it to buy an existing enterprise. Until only a few years ago, that strategy was disparaged as a dodge for shady, penny-stock ventures keen to avoid the scrutiny of a traditional IPO.

SPAC listings remain controversial among investors. Critics say they’re terrible for investors because they short-circuit the normal back-and-forth with regulators required for a traditional IPO, disproportionately reward sponsors, and tend to perform poorly after companies come to market. The U.S. Securities and Exchange Commission last month opened an inquiry into the SPAC boom, sending letters to Wall Street banks seeking information about their dealings with the investment vehicles.

But SPACs have surged in popularity since last summer, raising nearly $100 billion this year even before the Grab announcement. Their popularity has been buoyed by the SPAC success of a handful of high-profile companies including sports-betting firm DraftKings, and Richard Branson’s space tourism company Virgin Galactic Holdings.

For companies, one oft-cited advantage to going public via SPAC merger is that it’s faster than a traditional IPO, often shaving the time required to go to market by three or four months. Other proponents argue SPAC deals are less susceptible than the standard listing process to being scuttled at the last minute by market turbulence.

Ming Maa is president of Grab, the Singapore-based startup planning to go public later this year via a SPAC.
Paul Morris—Bloomberg/Getty Images

But Grab president Ming Maa, in an interview with Fortune, stressed that Grab’s decision to merge with Altimeter was driven by a desire to find committed, long-term investment partners who shared Grab’s values and strategic vision—and had nothing to do with concerns about speed or market volatility. “Working with Altimeter gives us a very unique opportunity to create a cap table with partners who are committed to be co-owners of the business and long-term partners,” Maa said. “Altimeter committed to a three-year lockup, which is quite unique.” That differs significantly, he noted, from “a traditional IPO where oftentimes the investment bankers will allocate capital to their institutional clients who may or may not be long-term investors.”

Highlights from Fortune’s interview with Maa, which have been edited for length and clarity, are below:

Fortune: Why a SPAC? And why now?

Maa: We have been preparing for a public listing for some time now. But I think partnering with Altimeter was the best way to go public for three different reasons. The first is, working with Altimeter gives us a very unique opportunity to create a cap table with partners that are committed to be co-owners of the business and long-term partners. Altimeter committed to a three-year lockup, which is quite unique. If I compare and contrast that process with a traditional IPO, where oftentimes the investment bankers will allocate capital to their institutional clients who may or may not be long-term investors in the company, working through this process with [Altimeter CEO Brad Gerstner] allowed us to really craft that cap table from day one.  

The second is Grab fundamentally believes in our mission for creating economic empowerment. In fact, we’ve created a Grab for Good endowment fund for our driver partners and our merchant partners, and Altimeter is donating 10% of their sponsor promote to the fund. That just again reinforces their commitment not just to the business but to the mission that we’re undertaking. 

And I think the last thing that I would just point out is that they just know what it takes. They are repeat entrepreneurs themselves, and we value their experience as long-term partners and co-owners of the business. For us it was very, very clear.

Was it important that a SPAC deal might help Grab to go public faster than a traditional IPO?

Not really. I think the timing was never a significant consideration for us. The key is having the right partners. The way that we’ve always approached our business is first optimize for finding the right partners. We’ve always believed in what internally we call standing on the shoulders of giants. Whether it’s Uber, Didi, Toyota, Microsoft. These are all leading businesses who are clear in their vision, clear in what they do. And could help us as guides to clearly see the path. We think that Altimeter and Brad stand with those folks. 

How do you assess Grab’s financial performance over the past year? 

What’s been fascinating in the public market is obviously there is always the question around profitability and the tradeoff between profitability and growth. I think that the way we’ve thought about this is that there doesn’t have to be a tradeoff between the two. If you look at the business now, we’ve been working very hard on our ride-sharing businesses, which has been profitable on an Ebita basis since Q4 2019. In our delivery business we’re profitable on an Ebita basis in five of the six markets that we operate in. And the key to all of this is that a superapp is so different from a pure ride-sharing app or a pure food-delivery business. There are two key benefits to the superapp. 

The first is we can very easily cross-sell new services to our consumers. That ultimately leads to higher loyalty, better spend, better unit economics over time, similar to what you see in China with WeChat.

The second point, which is often underappreciated, is the superapp strategy allows us to create a shared delivery fleet. These are drivers that can toggle back and forth between doing deliveries for people: They can deliver food; they can deliver packages during any given part of the day. The reason that’s so important is that creates more earning opportunities for partners, which allows us to lower our incentive costs compared to just a pure ride-hailing or delivery business where you’ll see these peaks and troughs during the day.  

How would you assess Grab’s burn rate relative to your competition?

Rather than comparing against the competition, I would say we have a very clear view around where the growth opportunities are for us and where we see growth for the next five or 10 years. And the key for us is to continue building out this one platform that serves all of your everyday needs. 

If you think about deliveries, it’s about more than just restaurants. It’s about the corner convenience store. It’s about fresh groceries. And we’re also very well positioned for the future of e-commerce, which is all about getting your packages in two or three hours instead of two or three days. And so that on-demand, last-mile delivery network is very powerful for us. 

The second is we’re going to continue focusing on investing in our financial services network, and that’s all about democratizing banking. And it’s quite difficult to appreciate what’s happening unless you’re on the ground, but we have now a very broad suite of financial services and licenses across all six major countries. And the way that we go to market is largely by fractionalizing the traditional services like lending, insurance, and wealth management.

At the end of last year, we also received a digital banking license in Singapore. That marks a very different business that has a tremendous amount of growth going forward, and also marks our entry into the regulated, the positive side of financial services. 

What are the regulatory challenges you face, and how would you compare what’s going on with regulating financial services in Southeast Asia right now with what we see happening in China? 

It all starts with appreciating that every country is very different. The Singapore regime is very different from Indonesia. Every product requires a license; every financial services offering that we have requires a licensing process. And getting those licenses and applying for those licenses takes time. 

And in fact we think this is an advantage that we have. We have now a significant portfolio of licenses to offer financial services, licenses across all the core six countries. We have lending licenses in five countries, we have digital banking licenses in Singapore. And when you think of the overall business, our business was founded on trust and building trust with consumers. And as we enter into the financial services business, it’s also now about extending that trust and really building that trust with the regulators.

In Malaysia we are the only non–government-linked digital wallet that the government uses to distribute COVID-relief aid straight to consumers. And the reason they use our wallet is that they know that the money they inject into the system will then be recycled in the real economy with small and medium enterprises, with micro-entrepreneurs, with restaurant owners, and so there is a very virtuous cycle that has developed by partnering with us. 

In Indonesia, our digital wallet has delivered more COVID relief to citizens than any other wallet. And again it’s about this partnership with the governments who understand that many times the most efficient and effective way to distribute aid, and to reach consumers, is through digital wallet companies like ourselves. 

Will this deal dilute the founders’ ownership and control?

There is obviously some financial dilution. The new private investment public equity investors and the SPAC investors coming in will take just under 12% of the company. But it doesn’t change the governance or the control of the business. I think what’s more important, frankly, is that as we mature as a business we’re evolving our governance to ensure that we have the right governance in place.