Remember back when it was a big deal for a company to hold an initial public offering? For starry-eyed founders, an IPO represented the pinnacle of the long ascent from basement startup to executive penthouse. If Slack’s debut on the market is any indication, however, a new wave of entrepreneurs may no longer view IPOs as the holy grail it once was. And that could have ripple effects throughout the financial industry.
This all started in 2018, when Spotify Technology SA opted to begin trading its stock on the New York Stock Exchange via a direct listing. Instead of retaining investment banks to underwrite an offering of shares to the public, the Swedish streaming music service simply let stockholders begin trading its shares on the exchange. Now, Slack Technologies Inc., which makes the workplace-collaboration app Slack, has followed suit with its own direct listing this month.
The build-up to Slack’s listing had some speculating that it could change the game for companies looking to go public. The success of the listing only added fuel to the fire, with Slack shares trading on day one nearly 50% higher than the NYSE’s reference price of $26 per share. (In a direct listing, an exchange seeks to establish a market-based price point for shares as a guide for investors, but it’s not necessarily the price at which the stock will begin trading.)
While the immediate aftermath of Slack’s listing raised questions about the future relationship between Wall Street and the upstarts of Silicon Valley, it’s also fair to wonder what it all means for investment banks in a broader sense.
Banks like IPOs because they generate lucrative fees. The banks get to buy the issuing companies’ stocks on the cheap, then sell them at a premium if the stock takes off once trading starts. Even as ride-sharing service Uber sputtered out of the gate, a conglomeration of dozens of underwriters including Morgan Stanley, Goldman Sachs and BofA Merrill Lynch raked in a total of $106.2 million from the deal.
An issuing company can cut those fees dramatically by choosing a direct listing over an IPO. What is generated by a direct listing typically gets split between a smaller cadre of investment banks that serve as advisers on the deal. According to Bloomberg Businessweek, three banks chopped up most of the $22 million in fees tied to Slack’s direct listing.
But before bankers start scouring the want ads, they should probably keep in mind that direct listings really only work for a small universe of companies. Slack and Spotify, for example, had already built up hefty war chests from private fundraising. Plus, they enjoyed significant brand awareness, diminishing the need for bankers to hawk their businesses to potential investors.