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THE BROAD VIEW

Slack Tech bucks debut trend with direct listing on NYSE

Software maker skips traditional IPO; closes well above reference price to command market value of US$19.5b

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Thursday’s debut makes Slack the second most valuable technology company to reach US markets this year.

San Francisco

A PARADE of initial public offerings (IPOs) from Silicon Valley this year has garnered a mixed reception from investors. Slack Technologies Inc took a different route on Thursday, and saw its shares soar as it went public without an IPO.

Slack opened at US$38.50 on the New York Stock Exchange on Thursday, well above the reference price of US$26 that was set for the shares in the direct listing. The stock closed at US$38.62, giving the company a market value of US$19.5 billion.

That is a huge increase from Slack's last private funding round in August, which valued the company at US$7.1 billion. Thursday's debut makes Slack the second most valuable technology company to reach US markets this year, topped only by Uber Technologies Inc's US$75 billion value and bypassing Lyft Inc at US$18 billion.

Slack, which makes software for workers to chat and collaborate on projects, directly listed its shares on the New York Stock Exchange, bypassing the usual fundraising process of an IPO and allowing shareholders to sell right away without a lock-up period.

A parallel for this unusual type of stock listing is Spotify Technology SA. The music-streaming provider went public using a similar manoeuvre last year, the last high-profile company to do so. Spotify's stock is up 13 per cent from its reference price since then.

Slack chief executive officer Stewart Butterfield said on Thursday that the company chose not to have a traditional IPO for a pragmatic reason: It did not need the cash. "We're not ideological crusaders on this stuff," he said. The direct listing process is a more efficient way to price a stock, he said, "but I don't think anything comes close to not having to dilute existing shareholders by 10 per cent." Mr Butterfield said he also wanted to avoid the lock-up period. "Especially in a period when you're locked up, when the supply is so constrained, the psychological impact of that can be a big negative," he said. "Giving employees the option early is more important."

This year is on track to be the busiest for public listings in more than a decade. Some have been warmly received. Pinterest Inc has risen 45 per cent since its March listing, and Zoom Video Communications Inc has nearly tripled in value. But the two biggest, Uber and Lyft, are trading below their IPO prices.

Investors - and private companies considering a similar path to the public markets - will have been closely watching the reception to the debut. Slack had been hoping to avoid the first-day pop that often accompanies IPOs and the price swings that can follow, and it largely got its wish: Shares closed less than one per cent above their opening price, and traded within 10 per cent of that benchmark all day.

Citadel Securities and the trio of banks that advised Slack on the listing - Goldman Sachs Group Inc, Morgan Stanley and Allen & Co - worked behind the scenes to help kick things off on Thursday morning, gathering buy and sell orders to assess a first-trade price.

In Slack's dual-class share structure, super-voting Class B shares must be converted to Class A common shares before they can be sold. The total trading volume on the first day was about 140 million shares, according to data compiled by Bloomberg. That was about 30 million more than expected, according to a person familiar with the banks' expectations. On Wednesday, Slack said that 194 million shares had been converted to common stock, which signals the number that could be sold. BLOOMBERG


What a direct listing is and why it makes banks nervous

1. How are direct listings different from IPOs?

Before an IPO, companies looking to raise funds in public markets hire investment bankers to stage a "roadshow", making presentations in different cities. Banks often price the IPO at a discount below the expected trading range, which can create a "pop" in the first day of public trading as new investors start to buy shares. In a direct listing, no new money is being raised and no new shares are sold. Instead, private investors or employees who hold shares can just start selling them on the public exchange.

2. How is a price set for a direct listing?

In a direct listing, a so-called reference price is issued by an exchange, with some investors seeing it as a guide. It is partly based on how the stock was valued in private markets. The reference price is just what the name implies; it is not the same at all as the offer price investors pay for shares in an IPO. The idea is for the market to determine the price, not the banks.

3. What is the appeal?

For companies and their existing shareholders, no lock-up - the term for the standard restrictions in an IPO limiting large shareholders from selling their stakes for 90 days or more. That is so that the market is not flooded with too many new shares at one time. In a direct listing, anyone holding shares can sell them immediately. Direct listings can be volatile, partly because unlike in an IPO, investor interest is not verified through share sales ahead of the trading debut.

4. Why now?

Companies are spending more years growing and raising private funds before going public. That means many have less of a need for new funds, and have a bigger existing shareholder base. Those investors want the liquidity that comes with trading on public markets. But they do not necessarily want the company diluting the value of their shares by issuing more of them. Another reason to do a direct listing is to avoid bank fees. An IPO can cost a company 7 per cent of the proceeds raised. If a company does a privately placed offering of stock, it is only paying a bank about 2 per cent.

5. What are the risks?

In a direct listing, there is no "stabilisation agent", a role usually taken on in an IPO by a bank working to make sure that the newly public stock does not swing wildly. Without a lock-up, large shareholders in a direct listing could potentially dump a lot of their holdings right away.

6. Is this going to become a more common way to go public?

Advisers feel that companies with big brand names may do well in a direct listing if they do not need to raise more money. Smaller, lesser known companies might have a harder time.