Slack’s Direct Listing Leaves Wall Street Fighting for Fees

A direct listing differs from an IPO in two key ways. First, unlike in an IPO, the company isn’t raising money with a sale of new shares. Instead, shares already held by founders and other early investors are simply listed for trading—in Slack’s case, on the New York Stock Exchange. It’s a way to make those shares easier to sell. Second, the stakes for the company are not as high. In an IPO, if the stock sells for a disappointingly low price, the company has diluted its shares while taking in less money than it had planned. It hires bankers to avoid that: Banks spend weeks gathering investors in fancy hotels across New York and San Francisco to drum up support. And they set a price for the stock before it goes public.

Ari Rubenstein, the chief executive officer of market-making firm GTS, says the No. 1 benefit of a direct listing is the lower cost. “We’ve talked to many corporate leaders who find direct listings a very appealing vehicle,” he says. “We definitely see it expanding.” But many bankers say the appeal will be limited for most companies, which need the cash an IPO can bring in. And unlike some startups, Slack, whose messaging system has become a popular alternative to corporate email, and Spotify are already well-known to many investors. “There are only a few companies that can successfully execute on a direct listing,” says Jeremy Fox, who oversees equity capital markets for Deutsche Bank in the U.S. “Spotify was one of them, Slack is one of them, but it’s not for everyone.”

Wall Street can still make money on a direct listing, but most of the spoils are divided by a smaller group of firms. The biggest IPOs may have as many as 20 investment banks as underwriters. For Slack, three banks—Goldman Sachs Group Inc., Morgan Stanley, and Allen & Co.—are splitting about 90% of the $22 million in fees earmarked for all 10 advisers, according to people familiar with the figures, who asked not to be identified discussing private information. Bloomberg Beta, the venture capital arm of Bloomberg Businessweek parent Bloomberg LP, is an investor in Slack.

Even before Spotify’s direct listing, IPOs had lost some of their mystique. Although this has been one of the busiest years for IPOs in a while, many Silicon Valley startups have been waiting longer before committing to go public. They’ve been able to raise plenty of money in private markets. So some dealmakers see a glimmer of hope in direct listings—they’re a way to persuade more companies to go public, and to build better relationships with Silicon Valley’s darlings.

In other words, to upsell. For example, Phil Haslett, the co-founder of EquityZen, a market for private stock, says Wall Street banks might advise their direct-listing clients on future acquisitions or help them arrange loans and credit facilities. Goldman Sachs and Morgan Stanley are each in conversations with more than a dozen firms wanting to know more about the direct-listing option, while Morgan Stanley has pitched it to Airbnb Inc., say people familiar with the matter.

When Slack goes public it’s expected to have a market of $16 billion to $17 billion, according to people familiar with the matter. That’s above its last funding round in August, when investors d it at $7.1 billion, and similar to the based on recent prices its shares have sold for in private market transactions. “There has been a very meaningful price appreciation in the stock in the past nine months,” says Haslett. The question now is: “Will Slack be able to maintain that price appreciation?” Even if it doesn’t, he says, the listing may be considered a success. The important thing is to make sure the price doesn’t plummet.

Spotify saw its shares fall 10% on its first day. Citadel Securities, which was Spotify’s designated market maker charged with ensuring orderly trading, says this was less volatile than a typical tech IPO. But it’s true that direct listings don’t start with the kind of support IPOs get. There’s no lockup period preventing some investors from selling, and banks don’t have the ability to buy or sell more shares through a so-called overallotment option designed to help stabilize the price.

For Slack, Goldman Sachs and Morgan Stanley bankers have already been talking to investors to raise interest in the shares and get a sense of who’s planning to sell, just as they would for an IPO, say people familiar with the matter. “A company needs to have eyes wide open to whether a direct listing is the right alternative,” says Matt Sperling, who oversees North American equity advisory at investment bank Rothschild and advised investors in the Spotify listing. “It creates additional levels of uncertainty, which makes me question how viable a structure it is,” he says. The market debut of Slack may make things a little clearer.

©2019 Bloomberg L.P.