What's going on?
Spotify, the Sweden-based music streaming service, listed on the New York Stock Exchange on Tuesday via a direct listing — cutting out the investment banks which would normally manage the initial sale of shares. The stock listed at $165.90, valuing the company at $29 billion, compared to being valued at $8.5 billion back in 2015 (tweet this) — talk about hitting the high notes!
What does this mean?
A direct listing is cheaper than an Initial Public Offering (IPO) because companies avoid most of the fees typically paid to investment banks for organizing and marketing their IPO. But it’s pretty rare – so why do it? One reason is to allow employees to sell stock whenever they want, without a mandatory holding period after listing (a.k.a “a lockup”) which is usually the case with an IPO.
But DPOs come with risks: investment banks usually commit to buying the company’s shares at a certain price if there isn’t enough investor demand. Without that backstop, trading in Spotify’s shares could be very volatile.
Why should I care?
For markets: A choppy time for an IPO and Spotify is riding the waves.
Markets have been volatile recently, with tech stocks having a particularly tough time. While not the best conditions for going public, Spotify isn’t selling new shares to raise money like companies usually do when they list on a stock exchange (they don’t need the money; they’ve got $1.5 billion in the bank!). They’re essentially going public to give more flexibility to existing shareholders to buy or sell shares, and an opportunity for new investors to buy.
The bigger picture: Tech disruption tends to cut out middlemen.
What do Spotify, Dollar Shave Club, and Uber have in common? They’ve all used technology to reinvent transactions and cut out middlemen. So perhaps it’s no surprise that Spotify has chosen to cut out bankers and list directly. Other cash-rich startups considering a direct listing will be keeping an eye on Spotify’s performance.