Seeing Spots

Last week, Spotify (NYSE: SPOT) – the music streaming business – began trading publicly for the first time.  Spotify’s CEO, Daniel EK, was non-pulsed, telling his employees:

Lots of people have asked me how I feel about tomorrow’s listing. Of course, I am proud of what we’ve built over the last decade. But what’s even more important to me is that tomorrow does not become the most important day for Spotify.  . . .  Normally, companies ring bells. Normally, companies spend their day doing interviews on the trading floor touting why their stock is a good investment. Normally, companies don’t pursue a direct listing.”

Spotify went public via the direct listing process, which basically means the company filed the necessary materials with the SEC (registration statement/prospectus, etc.), applied for listing on the NYSE and waited to become effective. Simple.

Because Spotify did not need to raise new capital, it did not go on roadshows (although it hosted an investor day), nor did it hire a bevy of investment bankers to syndicate the deal.  Further, with no new capital raised, there was no chunk of new shares plopped on the market at one time, there will be no green shoe (overallotment) to drop or lock-up period for existing shareholders (primarily company officers, employees and venture capitalists).

It’s not the traditional way most companies go public, but as I noted in a previous blog post (The Last Great Decade, March 7, 2018), we are currently experiencing something of a golden age of venture capital and private equity.  Today, start-ups have access to this smart money for growth capital, enabling founders to maintain control longer and avoid the pressures typically exerted over public companies.  As I concluded, “When a private company does decide to go public, the listing decision will likely be driven by a need for liquidity, not capital.”  This certainly seems to be the case with Spotify.

Now, what works for Spotify won’t necessarily work for everyone.  As a globally-recognized technology brand, Spotify has some built-in demand for its stock and won’t have trouble attracting sell side coverage.  It also has a solid record of private transactions that served as a reference point for setting price. To create and build trading volume, Spotify will be dependent on existing shareholders to sell.  So, volume will likely remain low (for a company of its size) for some time, which raises concerns of price volatility.  However, many small-cap companies deal with this issue all the time and I expect Spotify can as well.

I believe direct listings will grow – Spotify has shown the way – but it won’t displace the traditional IPO.

Lisa Ciota
Lead-IR Advisors, Inc.

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