By Maureen Farrell, Alexander Osipovich, and Anne Steele / April 4, 2018
Spotify became a public company but it didn't go about it the usual way. What the company did was go public with a direct listing. Spotify did not raise any new money when it began trading in public markets. That's very different than what happens in the traditional IPO in which companies issue new stock determining the price and amount of shares to offer with the help of investment bankers who earn significant fees. Those shares in an initial public offering first trade in what's called the primary market.
What that means is the stock has been sold for the first time. After that initial trade, buying and selling occurs in secondary markets. When companies are private they raise money and issue stock to investors and compensate employees was stock. In a direct listing investors and employees begin selling their shares in the public markets.
Spotify traded on the New York Stock Exchange. Price discovery occurred throughout the morning and the first trade was at 12:43 pm. The concerns about a direct listing are price volatility, a lack of buyers and sellers at the right price points and no investment bank ready to provide buying support. This kind of listing was helped because the company provided information on transactions of its private shares in regulatory filings which provided a reliable proxy for public investors.
A direct listing is a threat to investment bankers because no new shares are issued and they don't provide the typical support services for the higher fees they earn with a traditional IPO. For example, a year ago in March Snap paid about $100 million to its team of investment bankers while Spotify only paid $36 million. Spotify now has to contend with the challenges that face a Tech company. It needs to turn its first profit and deal with an increasingly competitive market in the music streaming arena. Another challenge is that its competitors are tech giants for whom music streaming is one of many services and businesses. They don't need to worry about making their business profitable. Music streaming for those tech giants is a way to entice users into their ecosystem.
1. Describe the key characteristics and the process of a traditional IPO.
2. Describe the key characteristics and process of a direct listing.
3. How does a direct listing present a threat to the traditional investment banking process?
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