Direct listings have been a big topic on the stock markets since Spotify’s successful IPO. Some experts even consider this method to be more efficient than an IPO.
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• Hype um Direct Listings
• New trend with advantages and disadvantages
• Experts support direct listings
When the Swedish music streaming service Spotify went public on April 3, 2018, it caused a stir because it did not choose the classic IPO procedure, but was the first large company to opt for a direct listing. Since then, there has been a real hype about the topic. In June 2019, the messenger service Slack followed the example of Spotify when it went public on the NYSE and was the second prominent technology company to choose the unusual route of a direct placement.
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IPO vs. Direct Listing
An IPO (Initial Public Offering) is a first-time public offering of securities on the stock exchange and thus the first listing of a share that is offered to interested investors. The company uses the help of banks that are accompanying the IPO.
In contrast, a direct listing does not require numerous support services from the investment banks. For example, there is no price maintenance, which the banks usually use to prevent excessive price fluctuations in the first few weeks after listing. In addition, with direct listing there is no advance pricing process organized by banks and therefore no rate guarantee. The starting price is only determined in an opening auction on the stock exchange through supply and demand. In this way, the company saves itself the relatively expensive banking services, but on the other hand the price development can be very volatile in the first few days.
Experts supported direct listings
Direct listings are also popular with VC financiers who invested in the startup company early on. Because there is no blocking period for existing shareholders, venture capitalists can sell their shares from the first day of trading if they so wish.
Michael Grimes has now also commented positively on direct placements at a “StrictlyVC” event. Accordingly, the Morgan Stanley investment banker considers the price mechanism to be “absolutely” more efficient.
Morgan Stanley had organized the direct listings for both Spotify and Slack. The bank managed the auctions, which were used to determine the price at which buy and sell orders matched. She also ensured that there was enough liquidity so that the listings could go smoothly.
Similar to Grimes, market analyst Michael Hewson from trading house CMC Markets UK had said shortly after the direct placement of Slack: In a certain way, a direct listing is the better way to determine the market value of a company going public than a classic IPO. Because with this method, there were no investment banks that could artificially increase the market value.
Direct listings are also the better alternative for tech investor Bill Gurley. He described IPOs, however, as a “bad joke”.
Trend could continue
The subject of direct listings is likely to continue to occupy the stock exchange traders. It is speculated, for example, that the apartment broker could also opt for this route when it goes public.
Finanzen.ch editors
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Image source: istock / Yong Hian Lim, Tashatuvango / Shutterstock.com, ScandinavianStock / Shutterstock.com
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