Direct Listings: Do the Investment Banks Have to Worry?
With the direct listing in the public market of Spotify S.A, many news articles have appeared in regard to the future of underwriting. A direct listing allows a company to transfer its shares to an exchange directly, avoiding the high fees of investment banks and the quiet lockup period. Yet, it remains critical for investors to take a look at the circumstances that led Spotify to choose a direct listing. While it is true that the range was continuously adjusted upwards in the hours leading up to the IPO, with the closing price much above the max of the range estimated by analysts, there is much more to direct listings.
The direct listing choice has much to do with the financial and cultural standing of Spotify. The direct listing does not generate any additional capital for the listing company, a choice that company can make only if there are already enough cash reserves and/or cash flow is positive. Additionally, Spotify is the eight largest Tech company to be listed; its size would make a traditional roadshow where executives explain the company to potential investors superfluous. Spotify itself has stated that a major reason for going public is to provide liquidity to early backers.
For most companies a direct listing is not reasonable - especially less-known, cash-seeking companies. The idea of direct listings replacing the traditional IPO is not new; back in 2004, when Google listed directly on the NYSE, the same voices were heard. Fourteen years later, underwriting remains a significant service in the process.
The Managing Director of Integrale Advisors, Keith Knutsson, commented, “There remains plenty of purpose for the underwriting – from privatizations to spinoffs, the market is diverse.”