- Business communications service Slack has opted to forgo an IPO and plans to list shares directly to public markets.
- The IPO is waning in popularity — the total number of publicly listed companies in the U.S. is down sharply from where it was 20 years ago.
- A Slack direct listing will save millions of dollars in underwriting fees, but it also gives up the chance to raise large sums of money to fund continued expansion.
Popular work communications service Slack is bucking the norm by planning to go public by way of a direct listing rather than the more traditional initial public offering. The direct listing will allow the company to make its shares available to the general public while ducking the huge costs associated with underwriting a Slack IPO, but it will also miss out on a key chance to raise additional cash to continue expanding its business. Slack’s chief product officer, April Underwood, announced that she left the company in a Medium blog post ahead of the listing.
Slack Follows Spotify’s Lead on Going Direct to the Public
Slack isn’t the first major unicorn to decide to take the plunge into public markets without the traditional IPO. Spotify also bypassed the traditional IPO in favor of a direct listing in 2018. With Slack, one of the hottest apps in the private equity market, joining Spotify, this could be a sign that some of the benefits of an IPO are beginning to look less and less important to many Silicon Valley tech firms that have other options for raising cash.
As of August 2018, Slack raised over $400 million in new funding based on a valuation of more than $7.1 billion. That could prove to be either too high or too low once the shares hit the open market and it becomes clearer what the rest of the investing landscape is ready to pay for them.
Direct Listing vs. IPO: Which Is Better?
Understanding why a company would opt to skip the IPO process requires understanding the purpose an IPO can play. An IPO involves the company in question hiring an investment bank as an underwriter and then selling a chunk of the company’s stock to clients of the bank at a set price. Only after that initial sale can people begin taking shares to the open market and buying and selling them there. The direct listing bypasses that entire process by simply allowing people who already own the stock to begin trading their shares on public markets.
The IPO has usually served two purposes for the company conducting it: The first is the chance to raise a large amount of capital, something that can be essential to a growing young company looking to expand aggressively. The second is to give its early investors and employees the chance to cash in on its stock. Prior to being publicly traded, shares in the company are private equity that come with a lot of limitations. Once the shares are public, anyone who received an equity stake in the company can sell on the open market and be rewarded for their faith in the firm early on.
So, a direct listing accomplishes the second objective — giving shareholders the chance to sell their stake on the open market and, typically, boosting the value of their investment — without doing the first part of raising extra capital for the company. A direct listing allows a company to skip the “lock-up period” where company insiders are restricted from selling their shares for a set period of time after the IPO. Although the company won’t be raising extra capital, that trade-off means avoiding the millions of dollars in underwriting fees that come with an IPO. In 2017 alone, the five largest U.S. investment banks collected over $6 billion in equity underwriting fees.
It’s notable that the current trend toward delaying or avoiding IPOs entirely has been going on for some time, with the total number of publicly listed companies in the U.S. falling by about 50 percent from 1996 to 2016.
Does a Direct Listing Make Slack a Better or Worse Investment?
What does all this mean if you want to invest in Slack? It’s hard to say for sure, but there are a number of ways you could potentially interpret the decision to do a direct listing, which might make you more or less interested in investing.
On one hand, if Slack is currently sitting on enough capital to fund its long-term plans, shelling out additional millions on underwriting fees while making your loyal investors and employees wait out a lock-out period doesn’t make a lot of sense. Going directly to the market provides the most immediate benefit to those shareholders and saves money on fees.
However, a more cynical investor might look at a company that’s so early in its life cycle that it doesn’t seem to have a need for the additional hundreds of millions of dollars — which Slack could probably raise with an IPO — and wonder why the company isn’t more ambitious. Is management looking to cash in on the value of their shares now while failing to adequately prepare for the future? It’s hard to say, but a direct listing — in which existing shareholders wouldn’t have to wait out a lock-up period — would be one of the best ways to return value to shareholders in the short term, even if it’s not necessarily the best call for the long-term business interests of the company.
So, opting for a direct listing could be a sign that the board is more interested in cashing in now than building something for the long run, and it could also be a sign that management is shrewd enough to understand their short- and long-term needs and isn’t going to waste money on an IPO it doesn’t really need. Only time will tell, but if Slack and Spotify can prove over the coming years that they were in the latter category, it could mean more and more firms opting to go directly to the market without the IPO.
Keep reading about where IPOs of the past decade are now.
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