Recently another big, young-ish tech company went public: Snap, Inc. After it did, a lot of people were wondering if it was the next big thing. Is it the next Facebook? Google? Apple? Or is it another Twitter? Only time will tell.
What is an IPO anyways? Why do companies “go public?” I wanted to write a short article because what Spotify is (rumored to be) doing is different and very interesting. They aren’t “going public” in the traditional sense, like Snap, Facebook, and all the others. They “direct listing” meaning they are going directly to consumers or investors and allowing them to trade freely without any recommended trading price. How is that different you ask? Well let me first explain what it means to be an IPO then I’ll go into what is means to be an “direct listing.”
When a company has an initial public offering (IPO), they are selling shares to institutional investors (first) and retail investors (second) in order to raise capital for their company. (Think for example if you go to a re-sale shop to sell some old stuff. The store will offer you a price to buy those items based on what the market demand is, and then they would resale those items they bought from you back to the market to make a profit). This is a way for people to also “feel a part of something big” (if of course the company stock price increases over time). Companies will go public in order to raise additional funds to make investments in more companies or back into their own research and development (R&D) to continue to grow their business and customer base.
When a company traditionally goes public, they hire an underwriter (or group of underwriters) to value their stock price and gauge interest in the institutional market for what the demand might be for ownership in the company. They set the price for what the shares will go for when offered on an exchange. So, when Snap, Inc. IPO’d, they had Morgan Stanley, Goldman Sachs, and others do their underwriting. For doing that, they received north of $80 Million in fees for the work they have done. So they determined an initial offering price of $17 per share which is what the banks bought shares for from Snap, Inc. Then when they opened for trading (resold to the public), the initial public offering price was $24 per share. That $7 per share is the “pop” that everyone hears about on IPO days for companies. That represents a 41% increase from when the banks bought and when they resold to the public.
What Spotify is looking to do is go direct to investor where they simply list their shares on a stock exchange and “let it ride.” Spotify CEO Daniel Ek has been taking some heat for even considering this. One of the downsides this type of listing for Spotify is that they may not be able to demand as high of a price if they don’t have the backing of underwriters to sell directly to other institutional investors. A potential positive for retail investors is it could potentially allow them to get in on the “pop” if, of course, there is an actual “pop.” Some IPO’s go boom, and some go bust, that’s just the part of the game of investing. (See 2000-2001 in the tech boom and bust).
This is in no way a recommendation to buy or sell Spotify in the event they do go public. I have no vested interest in Spotify and have no opinion to the value of the company. This is simply just to shed some light on an interesting perspective from Spotify, a company who may go public in a very unique way.
Sources:
http://www.cnbc.com/2017/03/03/snap-ipo-what-wall-street-banks-made.html
http://www.cnbc.com/2017/03/01/snapchat-ipo-pricing.html
http://www.cnbc.com/2017/04/06/spotify-may-go-public-without-ipo-report.html
https://www.recode.net/2017/4/6/15212462/spotify-selling-shares-without-an-ipo