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With Slack Sitting Pretty, Its Bankers Eye More Direct Listings

Sonali Basak and Eric Newcomer

(Bloomberg) -- Slack Technologies Inc.’s trading debut was everything Wall Street wanted it to be: nothing flashy.

The company’s advisers anticipate that more firms will adopt the so-called direct-listing model for going public, and give the banks an edge over rivals who have little to no experience in pulling off a listing like Slack’s.

There could be five direct listings next year -- or more, depending on how the overall market for public offerings shapes up, said Colin Stewart, global head of technology capital markets at Morgan Stanley. His firm, along with Goldman Sachs Group Inc. and Allen & Co., are the only three companies to have had lead roles on high-profile Silicon Valley direct listings.

“This will be something that companies need to consider as part of a toolkit to access the public markets,” Stewart said. “It’s clear that the model is attractive. The question will be on applicability -- how many companies will use it.”

While a direct listing tends to pay banks less than a typical initial public offering, the fees are shared among fewer firms -- meaning Goldman, Morgan Stanley and Allen & Co. gain significantly by being leaders in the market. In the case of Slack, that meant at least 90% of the $22 million in fees split among the three banks, people familiar with the matter have said. The banks’ biggest rivals have yet to work on a deal of Slack’s magnitude. And the two mega-banks handled the lion’s share of the trading volumes, according to three people with knowledge of the matter, who asked not to be identified discussing private flows.

‘New Model’

“It has been very exciting to pioneer this new model alongside our clients, and we expect other clients to increasingly utilize this path when it best achieves their objectives,” William Connolly, co-head of the West Coast financing group and head of technology equity capital markets at Goldman, said in an email.

That doesn’t portend a complete overhaul to the model for going public -- there are hundreds of traditional IPOs a year -- but Stewart’s prediction would mean more than double the number of direct listings from the past year. Unlike in an IPO, a company opting for a direct listing isn’t raising money with a sale of new stock. Instead, shares already held by founders and other early investors are simply listed for trading, making those shares easier to sell.

Goldman and Morgan Stanley have been in talks with more than a dozen firms considering the direct-listing option, people familiar with the matter have said. They include Airbnb Inc., one of the hottest IPO candidates in the next year. Adding to the encouragement is that Slack’s listing went smoother that Spotify Technology SA’s last year, with the work-collaboration company’s shares staying close to its opening price in the first two days of trading -- an execution win for market makers. A Slack investor who made a recent purchase when the shares were private is up about 43%.

IPO Openings

That’s roughly the same as standard public offerings, with this year’s technology and communications IPOs opening almost 50% above their offering prices on average, according to data compiled by Bloomberg.

Bloomberg Beta, the venture capital arm of Bloomberg News parent Bloomberg LP, is an investor in Slack.

While Morgan Stanley, Goldman and Allen & Co. have been most prominent in leading direct listings, other Wall Street giants have been involved in the space. JPMorgan Chase & Co., for example, has led direct listings for companies including Colony Real Estate Credit Inc., which started trading last year.

Citadel Securities was picked as the designated market maker for Slack’s trading debut, and its role, along with Morgan Stanley’s as adviser to the market maker, a role the bank created ahead of Spotify’s listing, was applauded by venture capitalist Bill Gurley in a Twitter post Thursday.

“Other banks want to position direct listings as ‘exceptional’ or ‘rare.’ MS believes they are 1) a better mousetrap, and 2) can be used broadly,” he wrote.

John O’Farrell, a partner at Andreesen Horowitz, one of Slack’s largest early investors, was on the floor of the New York Stock Exchange for the listing Thursday, and stuck around after the crowd faded to shake hands with the market makers. His firm may have reaped $2.6 billion, according to CB Insights. Venture capital firm Accel, which held 24% of Slack as of the stock’s debut, now has a $4.6 billion stake, the research company said.

Yet investors may not all cheer the model.

Gurley argues that personal relationships, ties to banks and an investor’s brand determine whether it can participate in an IPO, as opposed to the algorithms used in direct listings. In the Slack and Spotify direct listings, large shareholders weren’t promised allocations beforehand. Instead, the highest bidders end up getting the biggest exposure on the first day of trading.

“The hand-allocated IPO is archaic and it’s time for it to be a thing of the past,” Gurley said in a phone interview. “In a day and age of a globally connected Internet, it’s very easy for a company to be discovered and for investors to be educated about that company without visiting people one on one.”

But that also means investors may have to buy in at a higher price and therefore miss out on the initial IPO pop that many in the market have gotten used to. That could be a tough reality for large investors like Fidelity Investments that are often big buyers in an IPO, and increasingly buying more stock in private markets.

Smooth Debut

Still, the fact that Slack’s debut went so smoothly may spur different types of companies to choose a listing method that the company described in its regulatory filings as “novel,” said Joe Mecane, head of execution services at Citadel Securities.

Slack didn’t have many of the characteristics Wall Street tends to expect for a direct listing, Mecane said. Such companies typically have a well-known brand and a large base of existing shareholders to ensure stock liquidity -- and don’t have an immediate need to raise funds.

Unlike Spotify, Slack is seen by many as a business-to-business company and had a more concentrated investor base than that of the music-streaming service. Also, Slack burns a significant amount of cash.

--With assistance from Drew Singer.

To contact the reporters on this story: Sonali Basak in New York at sbasak7@bloomberg.net;Eric Newcomer in San Francisco at enewcomer@bloomberg.net

To contact the editors responsible for this story: Michael J. Moore at mmoore55@bloomberg.net, Daniel Taub, Liana Baker

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