Spotify is moving its headquarters to the Financial District from Manhattan’s Chelsea district. Spotify, in addition to its physical presence at NYSE, will make its mark when it chooses a direct listing. This is an unusual decision. Wall Street, the music industry, and Wall Street are all abuzz about what is expected to be the biggest tech public debut in 2018.
This article will cover everything you need: a quick overview of the typical IPO, how the direct listing works, why Spotify decided to buck the tradition, possible motivations for the decision, and its implications.
The Traditional IPO Process
We must first examine how IPOs work traditionally before we can understand why Spotify’s direct listing is considered a ” Non-IPO.” Initial public offerings are a way for a company to raise funds through the sale of ownership. The company was -owned by the founders, the early employees, and the investors before the IPO. This capital is used for the further development of the company, either organically or through acquisitions. However, it also dilutes the ownership of the original owners.
The company engages one or several investment banks to carry out a process called underwriting. Underwriters assist the company in establishing a fair price and allocating shares. Together, the lead investment bank and the company decide the amount they want to raise, what type of securities will be issued, and how the deal will be structured. The underwriters prepare documentation and submit it to the SEC for review. They will also conduct due diligence and determine a date when the stock is offered to the public.
The investment banks will go on a Road Show to court institutional investors. They also analyze the initial demand for the shares. Since smaller investors lack the capital needed, IPOs tend to focus on institutional investors. The underwriter will work with the company to determine an offer price. This is the price that the company will charge for its initial investors. Opening Price may change once the shares are traded on the open market by other investors. When a company first begins trading, the opening auction usually goes smoothly because the stock value is already established. Facebook’s IPO in 2012 is a good example of this. The IPO was infamously a failure because the IPO is often not a reliable indicator of what the market will price.
Spotify’s Unique Process of Going Public
Spotify has filed a confidential registration to the SEC on January 3, 2018. This indicates its intention to list its shares on the New York Stock Exchange in the first quarter. It is not surprising that it had stated it would go public in 2017. The Spotify IPO has been delayed to improve its position.
Spotify’s process is surprising in several ways. One is that it has chosen a direct listing and not to raise capital. In the past 20 years, only 11 natural listings have been made. It is used by small companies who don’t expect much trading volume. The median market capitalization for these companies is 530 million. Spotify, on the other hand, was valued at $8 billion when it raised money in 2015. It is now valued at around 19 billion.
By listing directly, Spotify bypasses the lengthy underwriting process. A typical IPO is characterized by the fact that it will not predetermine who gets which share of the company. Spotify’s direct listing allows anyone to trade Spotify shares via the exchange. However, the price and valuation will be to market. They are still enlisting assistance from three advisors: Goldman Sachs, Morgan Stanley, and Allen & Co.
While the exact logistics of opening day are still unknown, existing Spotify shareholders might indicate their intention to sell shares, and some investors bid for them. The exchange will publish a tentative pricing to balance the supply and demand. Other shareholders and buyers can then enter and adjust their prices and quantities, ultimately reaching a clearing rate. The stock of Spotify will open and trade as usual. It is the same as every other morning for all stores, except the Spotify stock does not have a previous closing price. It is less predictable. Recently published a Fortune article that said, “If an IPO’s like a marriage, a direct listing would be running away to elope.”
Why did Spotify choose this option?
There are a number of reasons that Spotify may choose this path, including that it doesn’t need cash, that it wants stock liquidity, and to create favorable conditions for the $1 billion convertible debt it achieved in 2016. Another reason could be to avoid the hassles of an IPO and to avoid the disaster that can occur if the offering is mispriced. That was the case with Blue Apron.
Establishing a brand name and business model
Spotify doesn’t need to raise money. Spotify is clearly the leader in audio streaming services. It has at least 60 million paying subscribers worldwide and another 80 million people who use its free, ad-supported version. Apple Music, with 30 million subscribers, is a close second. You must know that while Spotify reported $3.3 billion in revenue in 2016, it has never made a profit. Despite its popularity, it may not be necessary to hold the usual meet-and-greets during an IPO.
Lower Investment Bank Fees
The fees for Spotify’s three advisers are expected to be around 30 million, but this could change. The fees Snap Inc. paid to go public in 2016 were 100 million. Snap Inc. had a similar valuation to Spotify’s. Spotify’s decision may reflect a struggling underwriting business that the decline in IPO activity has hurt, as tech companies are increasingly turning to private financing. Equity capital markets (ECM) fees have traditionally represented around a quarter of total US investment bank revenue. However, this figure was only 13% and 15% respectively.