Since Spotify’s successful IPO, direct listings have been a big topic on the stock markets. Some experts even consider this method to be more efficient than an IPO.
• Hype about direct listings
• New trend with advantages and disadvantages
• Experts support direct listings
When the Swedish music streaming service Spotify went public on April 3, 2018, it caused a stir because it did not choose the classic IPO procedure, but was the first large company to opt for a direct listing. Since then, there has been real hype about the topic. In June 2019, the messenger service Slack followed the example of Spotify when it debuted on the NYSE and was the second prominent technology company to choose the unusual route of a direct listing.
IPO vs Direct Listing
An IPO (Initial Public Offering) is the first public offering of securities on the stock exchange and thus the first listing of a share that is offered to interested investors. The company enlists the help of banks that accompany the IPO.
With a direct listing, on the other hand, numerous support services from the investment banks are dispensed with. For example, there is no price maintenance, which the banks usually use to prevent excessive price fluctuations in the first few weeks after the listing. In addition, with direct listing there is no pricing process organized by banks in advance and therefore no price guarantee. The starting price is only determined in an opening auction on the stock exchange through supply and demand. In this way, the company saves on the relatively expensive banking services, but on the other hand, the price development can be very volatile in the first few days.
Experts supported direct listings
Direct listings are also popular with VC investors who have invested in the startup company early on. Since there is no blocking period for existing shareholders, the venture capitalists can sell their shares from the first day of trading, should they wish to do so.
Now Michael Grimes also commented positively on direct placements at a “StrictlyVC” event. Accordingly, the Morgan Stanley investment banker considers the price mechanism to be “absolutely” more efficient.
Morgan Stanley had organized the direct listings from both Spotify and Slack. The bank managed the auctions, which were used to determine the price at which buy and sell orders matched. She also made sure there was enough liquidity to allow the listings to go smoothly.
Similar to Grimes, market analyst Michael Hewson from the trading house CMC Markets UK also commented shortly after the direct listing of Slack: In a certain respect, a direct listing is the better way to determine the market value of a company going public than a classic IPO. Because this method lacked the investment banks that could artificially increase the stock market value.
Direct listings are also the better alternative for tech investor Bill Gurley. On the other hand, he described IPOs as a “bad joke”.
trend could continue
In any case, the topic of direct listings should continue to occupy the stock market traders. There is speculation, for example, that the apartment broker Airbnb could also choose this path when it goes public.
Editorial office finanzen.net
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