Typically, a company chooses the IPO route to raise money. What’s more, Spotify has not raised any new capital through this process. The newly issued shares are then sold to new investors on the exchange to raise capital.īypassing this process is risky, however, as there is no period of price discovery or equity research from the underwriting banks, which can open shares to price volatility.
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In a traditional IPO, the underwriters gauge new investors’ interest throughout the pre-IPO period or “roadshow,” which gives them an indication of how to price the shares. Facebook paid $176 million, Snap ponied up $98 million, and Twitter spent $68 million.īanks that advised Spotify throughout its process - Goldman Sachs, Morgan Stanley, and Allen & Company - are therefore losing out in this deal.Īnother reason to choose a direct listing over a traditional IPO is to avoid a dilution of shares resulting from newly issued stock. The Wall Street Journal reported that Alibaba paid $300 million in bankers’ fees. One advantage to a direct listing is being able to bypass the costly underwriting fees of investment bankers involved with pricing the shares. Image Credit: NYSE Why choose a direct listing?īy choosing a direct listing, Spotify is breaking away from the traditional IPO process so many other tech unicorns have chosen to take. In summary, Spotify started trading at $165.90 under the ticker name SPOT on the NYSE.
The SEC approved this request in February, which is lucky for Spotify, as it had already confidentially filed documents with the SEC at the end of December. In June 2017, the New York Stock Exchange (NYSE) made a request to the Securities and Exchange Commission (SEC) to alter its listings standards so as to accept direct listings. The tech and investor communities had eagerly speculated on how, when, and where this unusual listing will take place. Spotify sparked big speculation when reports first emerged last May that it planned to carry out a direct listing on the stock market, effectively bypassing the traditional IPO process. Unlike Spotify, Apple Music faces no pressure to be profitable while having almost unlimited corporate cash to invest in its service. With Spotify continuing to lose money, it certainly could have used that cash as it faces rivals such as Apple Music, which has been growing rapidly since its launch in 2015. With the number of IPOs stagnating in recent years, the tech industry will be watching the performance of Spotify’s stock in the months ahead to see whether its move should be duplicated or avoided by other overvalued unicorns searching for some kind of exit. While a direct listing saved Spotify millions of dollars in banking fees, it also meant that the company itself did not raise what could have potentially been billions of dollars for its own use. But in choosing to make a direct listing rather than pursuing a more traditional initial public offering (IPO) of stock, Spotify took an enormous gamble. The stock sale represents a major milestone for a company that pioneered the shift away from sales of digital downloads toward subscription-based music streaming.
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