As the workplace-messaging company, Slack is heading towards going public; it eyes the New York Stock Exchange for its unorthodox Direct Listing.
Direct Listing is an unusual path for companies when announcing their initial public offering because a company places its stock on a public exchange without raising any money or using underwriters. The company doesn’t choose the price or who gets to buy in the night before trading begins.
Slack chooses one business day after the Lyft IPO, and the second major startup to follow NYSE’s unique way of introducing new companies to the stock exchange market.
Spotify was the first major startup company that chose NYSE and did not face any significant problems throughout its journey going public.
Here are some reasons why Spotify chose Direct Listing:
List Without Selling Shares– Spotify has plenty of money with $1.3 billion in cash and securities, has no debt since it converted that into equity for investors, and has positive free cash flow.
Liquidity – Investors and employees can sell on the public market and sell at the time of their choosing without investors shorting a lockup expiration, while new investors can join in.
Equal Access– Bankers won’t get preferred access. Instead, the whole world will get access at the same time. “No underwriting syndicate, no limited float, no IPO allocations, no preferential treatment.”
Transparency – Spotify wants to show the facts about its business to everyone via today’s presentation, rather than giving more info to bankers in closed-door meetings.
Market-Driven Price Discovery – Rather than setting a specific price with bankers, Spotify will let the public decide what it’s worth. “We think the wisdom of crowds trumps expert intervention.”
Slack is still in communication with the Securities and Exchange Commission over details on how the deal will work and isn’t expected to go public until June or July, says WSJ.
Companies don’t usually seek a direct listing to raise more money from the revenue gained on the first day a company goes public.
With the traditional IPO announcement, companies have the upper hand and can decide on their initial price, with regards to IPO regulations and the SEC, but companies usually earn a big sum through this.
But, Slack wouldn’t be really looking forward to the payout they would get from a good first few days; the company-messaging app was last valued privately at more than $7 billion.
As of earlier this year, Slack had more than 10 million daily active users and 85,000 paid customers. The company has raised more than $1 billion since it launched in 2013 at increasingly higher valuations and still has ample cash on its balance sheet, according to people familiar with the company.
However, with Spotify and Slack eyeing direct listing, other companies may, most likely, also follow the suit.
It is reported that Airbnb Inc. and Lyft’s top competitor, Uber, is also heading towards NYSE for direct listing in their IPO. Uber, which is set to go public in a few months and Airbnb in 2020.
In line with this, NYSE is on a head-to-head battle for the biggest stock listings in the US with Nasdaq.
Particularly, 2019 is a big year for Wall Street and Silicon Valley since the unicorns are deciding to go public with Lyft heading the game. Stocks have been trading near record highs, and volatility has been near record lows this year.
On the other hand, critics said that Lyft’s performance on the stock exchange could determine the future of these tech unicorns when they go public, but the 12% drop in Lyft’s shares on the second day of its trading doesn’t really put out hope. This could limit investor enthusiasm towards new companies such as Slack, Uber, etc.
This is where NYSE’s direct listing comes into play, they emphasize that their designated market makers make sure to combat volatilities on the first day of trading. There may be no Wall Street to significantly raise the price of stocks, but there will be actual people who can manage the market.
Slack is working with Goldman Sachs Group Inc., Morgan Stanley, and Allen & Co. as advisers, not underwriters. The trio played the same roles on Spotify’s direct listing and was paid about $36 million in total for their work.
A typical IPO can have more than a dozen underwriters who in some cases earn a lot more.