Didi Tried Balancing Pressure From China and Investors. It Satisfied Neither.

Unaware of the impending threat from Beijing, these people said, Didi’s bankers pushed the deal forward. On June 30, the world’s largest ride-hailing platform began trading on the New York Stock Exchange. On the second day of trading, Didi’s shares rose 16%, valuing the company at about $80 billion.

But the fanfare was short-lived. Beijing, taken by surprise by the IPO, struck back on July 2. It put Didi under cybersecurity review and banned it from accepting new users. Over the next few days, it told app stores to stop offering Didi’s app, and announced it was tightening rules for Chinese companies listed or looking to list overseas.

Didi now faces a double whammy: regulatory action at home and blowback from U.S. and global investors who wonder how the company could have gone ahead with a listing while under a regulatory cloud. Didi’s shares are now 14% below their IPO price.

After saying it wasn’t aware of Chinese regulators’ plans to put it under review, Didi has said little else. The company’s outside public-relations representatives didn’t respond to requests for comment.

In the U.S., the IPO bankers have faced anger and suspicion from fund managers and other investors questioning why they didn’t see this coming. Spokespeople for

Goldman Sachs Group Inc.,

Morgan Stanley

and

JPMorgan Chase

& Co., the three main underwriters, declined to comment.

Major Didi investor

SoftBank Group Corp.

was surprised to see the ride-hailer move so swiftly with its IPO, according to a person familiar with the matter. Once the IPO process started, SoftBank was unaware that Didi was getting pushback from the Chinese government, the person said.

Already, the consequences have extended beyond Didi itself. With investors now wary, bankers say, the pipeline of Chinese companies planning a U.S. IPO could run dry for a while.

The growing unease on both sides of the Pacific marks a turn in what has been a successful relationship between China and Wall Street. Blockbuster listings such as the 2014 IPO of

Alibaba Group Holding Ltd.

let Chinese companies draw on the savvy of U.S. bankers while letting U.S. investors make money from their growth.

Didi was founded in 2012 by

Cheng Wei,

now 38, a former Alibaba executive. The company grew with venture-capital funding, and by late 2017, was valued at $56 billion. It eventually expanded to other parts of Asia, Latin America and beyond.

The coronavirus pandemic initially dented its ride-sharing business, but by early this year, business had largely bounced back in China, as had financial markets from Hong Kong to the U.S. Many technology stocks were soaring, and demand for IPOs was roaring again.

The regulatory environment in China, however, was shifting. After Beijing forced

Jack Ma’s

Ant Group Co. to call off its highly anticipated IPO in Shanghai and Hong Kong, Chinese regulators began calling in many internet technology companies to meetings and expressing displeasure with some of their business practices.

Kendra Schaefer,

head of tech policy at consulting firm Trivium China, said China is still playing catch-up with technology developed by its platform companies. “It is only over the last five years that China’s thinking on how it wants to approach the regulation of big tech and of data has really begun to solidify,” she said.

Initially, Didi had planned to list on the Hong Kong stock exchange. By early April, though, Didi had abandoned that plan, mainly because of that exchange’s requirements that listing applicants’ businesses must be compliant and fully licensed in all markets where it operates, according to people familiar with the company.

Complying with rules across all of China’s provinces and municipalities would have been difficult for Didi. The Hong Kong exchange offered a compromise: stripping the noncompliant businesses and listing the rest, one of the people said. Unwilling to make the concessions, Didi decided to head to New York.

A Hong Kong stock exchange spokesman said the exchange wouldn’t comment on individual companies.

In its prospectus, Didi noted that it had been paying fines for its drivers where it didn’t comply, and the absence of licenses could “materially and adversely” impact its operations.

To list in New York, Didi knew it needed tacit approval from Beijing, even if currently no regulations in China require companies like Didi, which are incorporated in offshore tax havens, to seek formal approval for overseas listings.

Didi had been discussing its plans with the Ministry of Transport and various agencies, according to people familiar with the discussions. Both the China Securities Regulatory Commission and the National Development and Reform Commission, the top economic-planning agency, appeared supportive of its listing, these people said.

When Didi filed publicly for the New York IPO in early June, two of the people said, the company tentatively decided to make its debut in early July, and informed officials from China’s transport ministry, NDRC and the stock and cyberspace regulators in Beijing.

The Chinese officials urged the company to postpone the share sale because Beijing was concerned that IPO documents required by U.S. regulators could have sensitive information and data it didn’t want U.S. authorities to have.

The officials made clear to Didi, according to the two people, that the government didn’t intend to block the IPO, but wanted the company to wait until it had carried out the proper security checks and made sure the documents it would present to the U.S. regulators contained no sensitive information.

The officials also wanted to address the issue of audit working papers, the two people said. Congress passed a law last year to require U.S.-listed Chinese companies to hand over audit documents for U.S. regulators’ inspection, or risk being kicked off the stock exchanges. China has long resisted such demands, and the two nations have been in a standoff on the issue.

Audit materials could contain raw data such as meeting logs, user information and email exchanges between the company and government agencies, among other things.

One person close to the company said Didi hasn’t handed anything sensitive to U.S. regulators to date. Chinese officials, however, argue that it is for regulators, not the company, to decide what is sensitive. In China, the ride-hailing company is classified by law as a “critical infrastructure provider,” language that signals national-security sensitivities.

Beijing’s suggestion that Didi delay its IPO left the company having to decide whether to comply with U.S. or Chinese priorities.

Didi signaled to regulators that it would consider the request, and that it wouldn’t be a problem to postpone the listing if needed, say people familiar with its communications with regulators.

Meanwhile, in New York, the listing process was racing ahead.

Didi had aspired to reach a valuation of more than $80 billion, according to people familiar with the matter. After some initial conversations with prospective investors, who were skeptical of such a high valuation, Didi lowered its expectations.

Didi filed public IPO paperwork with the Securities and Exchange Commission on June 10. A typical IPO timeline would have resulted in a start to trading in early July, in line with Beijing’s expectations. But Didi sped up the process, setting a target price range and size for the share sale on June 24. It was one of the shortest periods to take investor orders for an IPO in recent memory, according to bankers, investors and lawyers.

The roadshow, which consisted of round-the-clock virtual meetings because of time differences, lasted just three business days. A typical 2021 roadshow lasted 8 ½ days, according to data provider Dealogic.

On June 29, Didi priced its IPO at $14 and sold $4.4 billion worth of stock, more than planned, setting up its shares to begin trading on NYSE the next day.

Some Chinese tech-industry executives and investors say Didi’s IPO timing damaged trust between China’s government and its business community. One prominent Chinese tech executive said the process of listing in the U.S. had been based on good faith with regulators at home. “It takes decades to build up trust and one scandal to break it,” the person said.

Going public in the U.S. when it did allowed Didi to raise money at a good time and gave its early investors an opportunity to cash out, some in the industry said. The tech executive said unless the retaliation gets much worse, it still is a win for Didi.

On Friday, Beijing ordered app stores to remove more apps operated by Didi, including one used by its drivers, saying the apps illegally collect personal data. In a statement on Weibo, a Twitter-like Chinese platform, the company said: “Didi sincerely accepts and firmly obeys the requirements made by relevant authorities.”

—Maureen Farrell contributed to this article.

Write to Jing Yang at [email protected], Keith Zhai at [email protected] and Corrie Driebusch at [email protected]