Plenty of Slack in direct-listing model
Firm’s debut, lower costs and a more open market haven’t panned out for shareholders
Investors evaluating Slack Technologies’s path to the public markets through direct listing should take heed: the direct route may have unmarked hazards along the way.
Several qualities about the cloud-based messaging service made it a unique candidate for this type of listing, which enables companies to sidestep the traditional initial public offering process and go straight to public investors looking to buy shares. But the advantages of direct listings—such as lower fees—come with downsides as well.
In the end, it could be investors who pay.
Direct listings differ from traditional IPOs in that no new shares are issued, therefore raising no new capital. Instead, existing shareholders have an opportunity to sell their shares on the open market through a more casual marketing process than one typically led by investment bankers.
Slack, which touts itself as a collaboration hub and cites Microsoft as its main rival, benefited from its recognizable name.
Though it was founded in 2009 as a gaming company, its pivot to office messaging and fast growth to 10 million users likely helped attract publicity to the listing without a traditional process.
Public investors seem to be hot on cloud-based disrupters coming to market, and Slack had the benefit of following closely after Zoom Video’s sensational debut
. It also had plenty of cash sitting on its books so it didn’t need to raise money. Hitting the market with less help from bankers made sense.
Slack paid $26.7 million in issuance and distribution fees, including to advisers. Lyft, which has a similar market capitalization, paid multiples of that sum. The relatively low fees helped the company conserve cash, though Morgan Stanley, Goldman Sachs and Allen & Co. still divvied up a decent pot for less work.
The market was more liquid, too. In its first day of trading, volume equivalent to roughly a quarter of Slack’s shares outstanding traded hands. That compares will 11% for Uber, according to S&P Global Market Intelligence.
Price performance has been less spectacular. Slack opened 48% above its reference price, which functions as a kind of guidepost pre-trading, but at which no actual shares exchange hands. Since then, it has been volatile.
At Monday’s close, it fetched 5% less than it did in its opening trade.
That compares with an average increase of 7% from the initial trading price for seven other highprofile tech listings this year through eight trading sessions, not including the pop from the initial IPO price.
Furthermore, Slack listed shares without a lockup period. Lockups are fairly standard in IPOs and keep company employees from dumping shares rapidly.
The lockup can help support the price initially, though it creates a risk of dilution at a later date.
Although Slack’s Class B shares with greater voting rights haven’t been listed, they can be converted to A shares at any time. This means investors are at risk of dilution if a big holder decides to dump shares.
Slack might have benefited from some aspects of a traditional IPO. According to its prospectus, 40% of revenue in fiscal 2019 came from just 575 paid customers.
In theory, operational details such as these might have drawn a more thorough vetting in a traditional IPO as institutional investors with dedicated analysts interacted with the company’s bankers in a roadshow.
In practice, heady times have meant that this process has hardly mattered in many recent offerings.
Slack succeeded in its goal of listing shares and giving investors liquidity, and bankers took their spoils, even if a bit less than normal.
What’s less clear is whether investors will turn out just as well.