What is a direct listing and why did Slack choose it over an IPO?

21 Jun 2019

Image: stu99/Depositphotos

Workplace messaging and collaboration tool Slack has now gone public, but it wasn’t an IPO. So, what is a direct listing and how is it different?

Slack has officially gone public. The San Francisco-based company, which offers a workplace messaging tool that has become a mainstay of the modern office, now has an estimated valuation in excess of $24bn, The Guardian reports.

One of the many standout elements of the offering – bar its success – was that the route Slack opted for is a little unusual. Instead of an initial public offering (IPO), it elected to go for a direct listing.

What is a direct listing?

A direct listing, also called a direct offering, is distinct from an IPO. In an IPO, a company works with a group of underwriters, often a handful of Wall Street investment banks, to underwrite a financial asset in order to ward against financial risk. The underwriters will, in the case of a stock offering, agree to hold any shares they aren’t able to sell.

Though Slack did work with investment banks in the lead-up to the listing, it did not engage them as underwriters. This is the primary difference between a direct listing and an IPO. IPOs and direct listings also differ in that with the latter, no new shares are created – the company only sells existing shares.

Before an IPO, the underwriters will make a series of presentations (it’s called a ‘roadshow’). Through this, the underwriters assess demand and determine a stock price. Direct listings are priced instead by the market itself. Before trading commences, the stock exchange will assign an ‘initial reference price’ instead.

Why go this route?

Slack is following in the footsteps of Spotify, which famously went for a direct listing in lieu of an IPO in April 2018. According to a Harvard Law School case study on the Spotify IPO, the company opted for this route instead because if offered greater liquidity and allowed for more transparency with market-driven prices. The study concluded that Spotify’s opening price exceeded the initial reference price and experienced “relatively low volatility”.

While some would argue IPOs are a safer bet, the banks also generally charge a commission for all the services they provide. So with a direct offering, the company gets more of the capital as well as the other benefits listed above.

What has the company said about it?

Speaking to CNBC, Slack CEO Stewart Butterfield said the company didn’t want to go with an IPO because it wanted to bypass the closed-door capital-raising process and go instead ‘direct’ to the public.

“I think there’s a lot of investors who are used to a model where they get a small allocation, they wanted a big one. In a direct listing, at least they have an opportunity,” Butterfield said.

It seems that for Slack, the main attraction of a direct listing was this aforementioned transparency, as it allows them, Butterfield said, to reach a market-clearing price a lot earlier. “The savings aren’t that great, to be honest. And that’s certainly not the motivator.”

What have others said?

The company has, broadly speaking, been praised for the success of its direct offering. Yet some have argued that it is gearing up to face down with two hugely formidable opponents: Facebook and Microsoft.

Both have launched their own workplace productivity tools. For Facebook it’s Workplace, while Microsoft has launched Teams. Microsoft, Statista points out, stands to be particularly tough competition it has great standing in the world of enterprise software.

Ryan Duguid, chief evangelist at Nintex, agrees, and maintains that Slack has gone public to “build a stockpile” ahead of this competition. “It isn’t surprising as they’re going to get drawn in to an expensive battle with Microsoft, Google and others who sit at the centre of productivity in the enterprise. It’ll need deep pockets to build out a broader set of capabilities and maintain a competitive edge.”

Will others follow suit?

With Slack following Spotify, this now makes two high-profile companies that have elected to go with a direct listing. This may inspire more businesses to follow suit.

The transparency element of these kinds of listings is likely to be a draw for companies as well. ‘Radical transparency’ in business is becoming increasingly popular. Ray Dalio, founder of successful hedge fund firm Bridgewater Associates, has credit radical transparency in leadership as being central to his success.

So, perhaps direct listings are on the cusp of booming in popularity. In any case, the novel approach seems to have worked out well for Slack.

Wall Street sign. Image: stu99/Depositphotos

Eva Short was a journalist at Silicon Republic