Slack Inc.’s IPO is near, and excited investors are already eyeing another possible major payday. The internet communication platform has already submitted personal documentation to go public in the existing year– but do not anticipate this one to be much of an IPO.
Slack, an acronym for “Searchable Log of All Discussion and Understanding,” may not have killed off email as the founders assured but intends to make a killing for existing investors. The company plans to bypass a traditional stock IPO and rather borrow a leaf from music streaming giant Spotify Inc.’s (NYSE: SPOT) playbook and list its shares directly in a Direct Public Offering, or DPO.
Slack eyes uncommon listing
Generally speaking, a business that wants to do an IPO get the services of one or several underwriters to facilitate things like handling regulative issues, identifying the IPO rate, offering shares to initial investors and so on. With a direct listing, however, a company’s existing investors sell their shares straight to the public without the company attempting to raise extra capital by selling secondary shares to the marketplace.
At first glimpse, taking this route may appear counterproductive considered that start-ups and young business like Slack are development makers that tend to prioritize growing customer bases and earnings over anything else. Many start-ups choose standard IPOs due to the fact that they supply a hefty injection of extra money that they can use to broaden their operations. However sometimes, young business with powerful brand names and designs find that they simply do not need this extra money.
Such is Slack’s case, offered its already enviable property base including a lot of cash (concealed amount); 8 million active users, 3 million paying users and a $7.1 billion assessment, according to personal equity research study firm, Pitchbook.
A DPO is an attractive proposal for Slack for numerous factors, including lower listing expenses and no lock-up period. Sure, the company will deal with lenders like Morgan Stanley, Goldman Sachs, and Allen & Co. to help with the DPO. The costs, nevertheless, will be significantly lower compared to what a normal IPO needs.
Having been around for years, Slack has become a well-established brand and handled to surpass apps like Skype, HipChat and Google Hangouts so there’s less need for underwriters to market the shares.
Further, existing shareholders will be able to offer their shares right away without any lock-up period. Lock-up durations generally last 90-180 days and are mainly created to discourage experts from discarding their shares for a fast dollar. Given that Slack is seeking a $10 billion valuation for its IPO (or roughly 30 percent premium), some existing financiers will no doubt wish to squander as rapidly as possible– which is a good thing for the rest of us.
Following in Spotify’s footsteps
A direct listing may sound like a hassle-free path for a cash-rich business like Slack to go public. For outsiders looking to acquire the shares though, DPOs come with quite a variety of obstacles as we can learn from Spotify’s 2018 listing. As you might imagine with no secondary shares readily available, bad liquidity tends to be the most apparent issue with DPOs.
In Spotify’s case, far fewer-than-expected existing shareholders sold their shares at the DPO hence contributing to a preliminary shortage that drove prices up before tanking. AREA stock opened at $165.90 at around 12.40 pm New York city Time prior to leaping to an intra-day high of $169 a number of minutes later on with a simple 5.6 percent of the available shares to trade altering hands. AREA managed to make strong gains to strike an all-time high of almost $200 in July prior to crashing stunningly.
The huge threat with popular brand names like Spotify and Slack is that they can become victims of their own success.
Need can far outstrip supply which in turn can synthetically drive costs up. However, eventually the honeymoon period is over and fundamentals kick in. Kicking the tires a little before purchasing might, therefore, be an excellent method.