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What is a Direct Listing? And why did Slack (WORK) opt for this type of listing? We explain

Jun 20, 2019

We Crunch the Numbers, You Make the Trade.We Crunch the Numbers, You Make the Trade.
We Crunch the Numbers, You Make the Trade.We Crunch the Numbers, You Make the Trade.

 

  • Slack (WORK) went public today in a process called a Direct Listing, foregoing the more traditional Initial Public Offering (IPO) that most investors are familiar with
  • A Direct Listing differs from an IPO in a number of important ways and for some companies, Slack included, it is a more attractive option
  • In an IPO, a company sells shares to the public and raises funds for the company and sometimes for existing shareholders of the previously private company (holders monetize their holding) 
  • When an IPO is undertaken, the company hires a group of investment banks that sell the shares to the public and sale is said to be underwritten by that group of investment banks
  • In a Direct Listing, there is no sale of share and no funds are raised
  • For a Direct Listing, the company hires a one or two banks as advisors to help it communicate with the public, but they do no selling
  • Before an IPO, the investment banks announce a price range and gauge interest from investors, and will sometimes adjust that range higher or lower
  • Once a price is chosen for the sale, the group of investment banks tries to sell the shares to the public 
  • In a Direct Listing, a reference price is set, but as there is no sale, it is only used for reference, allowing investors to have an idea of the proposed valuation for the company once it is listed
  • The shares simply start trading on a day chosen ahead of time
  • The price at which the shares start trading is ultimately set by investors bidding for the stock in the market
  • Costs associated with an IPO are much higher than those for a direct listing as there is a lot more legal and analytical work involved on the part of the investment banks
  • The potential downside for a direct listing is that there is no group of investment banks defending a stock price-in an IPO, the group of investment banks will step in to support the stock price if it starts to slide
     

 

Better Data for Better Investment DecisionsBetter Data for Better Investment Decisions
Better Data for Better Investment DecisionsBetter Data for Better Investment Decisions

 

  • Slack is just the second Direct Listing on the NYSE, Spotify (SPOT) used the same option to list its share last week
  • So, why did Slack opt for a Direct Listing?  There were a number of reasons:
    • Slack had no need to raise funds, it has cash on its balance sheet and was valued at over $7 billion in its last round of financing
    • It paid about $36 million to banks for their work, an IPO would have cost tens of millions more in fees 
    • A Direct Listing is said to more effective at getting an efficient price compared with an IPO
  • Slack had a reference price of $26 and opened trading at $38.50 and has traded as high as $42 in today’s session
  • Spotify was not so lucky last year, its shares traded lower after its Direct Listing
  • There is one group that REALLY doesn't like Direct Listings-investment banks-as IPOs are among their most lucrative endeavors

 

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