In a highly anticipated move, Slack shares will be up for sale on the New York Stock Exchange beginning Thursday, and the NYSE has just set its reference price at $26 a share. Slack is going public by direct listing, rather than the traditional initial public offering in which a startup works with an investment firm to line up buyers, raising capital before the stock arrives on the markets, and the investment firm acts as an underwriter, helping to set the price and shore up that price to keep it from falling too far.

Slack is only the second large company, after Spotify, to go public in this manner, in which companies simply list themselves on an exchange and large shareholders, typically their top executives, just start selling. There are potential downfalls. Without an underwriter to stabilize things, share prices can be volatile especially right after the offering. The company also doesn't gain any new capital, although the founders typically do when they sell their shares. If too few shareholders sell on the first day, lack of supply can be a problem, adding yet another question mark to an already unpredictable situation.

But there can be big advantages, too. Because Slack is not issuing more shares, existing shareholders won't see the value of their shares diluted, nor will they lose any control of the company if they choose not to sell. And, perhaps most important, they can save tens of millions on investment banking fees. When Spotify went public by direct listing, it spent $36 million in advisory fees. When the similarly-sized Lyft went public with a traditional IPO about a year later, it spent $70 million--almost twice as much--on underwriters. Slack is expected to spend only about $22 million for advisors during its public offering.

Another big difference between a traditional IPO and a direct listing like Slack's is that there's no underwriter setting the starting share price. So in a direct listing, the exchange itself comes up with a "reference price" to create some guidance for what shares are worth, something like an auctioneer's starting bid. The NYSE reference price of $26 sets Slack's valuation at $15.7 billion, not too far from the $16-$17 billion the company is reportedly aiming for, which is more than twice the $7 billion of Slack's most recent previous valuation. 

Will Slack be like Spotify?

As only the second large company to go public by direct listing, Slack's launch on the NYSE tomorrow will be closely watched. If all goes smoothly, as it did with Spotify, more technology companies may be emboldened to follow the direct listing approach, skipping the underwriters and their enormous fees. Still, it certainly won't work for everyone. Companies going public this way won't have the "road show" in which investment firms take top executives out to meet large investors, educating them about the company and its strengths. So it probably won't work for a company without high name recognition. A popular consumer brand such as Spotify is typically considered a good candidate for a direct listing. Slack, of course, is a B2B company, but its widespread use still makes it a fairly familiar name.  

A direct listing also won't work in the typical situation where a company seeks to raise capital through its IPO, since no new capital accrues to the company. Although Slack is not profitable and may not be for a long time, it has plenty of cash in reserve--enough to keep operating for another eight and a half years at its current burn rate. That, along with its high name recognition, make Slack a perfect candidate for direct listing.

Companies typically want their reference price to be set a bit low so that the stock will "pop" in its first hours of trading, and sources close to the deal say you should expect to see the share price rise quickly above that initial $26 assessment. If you want to buy some Slack shares yourself, its ticker symbol will be WORK. 

Published on: Jun 19, 2019
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