What’s Going On Here?

• Slack, the American workplace messaging service, listed on the US stock market on via a direct listing – cutting out the investment banks (which normally manage the sale of new shares).

Direct listings are an alternative to IPOs in which a company does not work with an investment bank to underwrite the issuing of stock.

• The stock price immediately jumped by 50%.

What Does This Mean?

• The reason why direct listings may be more favorable is that:
  • A direct listing is cheaper than an IPO because. Companies avoid most of the fees typically paid to investment banks (for organizing and marketing their public debut).
  • It’s pretty rare – but it also enables employees to sell stock whenever they want, without the mandatory holding period after listing (a.k.a. “lockup”) like an IPO.
• But direct listings come with risks: unlike an IPO, there are no investment banks committed to buying the company’s shares at a certain price if investor demand is weak. Without that backstop, initial trading in Slack’s shares could be very volatile.

Why Should I Care?

For markets: There may be trouble ahead.

• Investors’ appetite for Slack shares may have been helped by the US central bank’s acknowledgment of growing pressure to lower interest rates in 2019, which makes stocks a more attractive buying proposition.
• Of course, Slack isn’t selling new shares to raise money (like companies usually do when they “go public”) – but with stiff competition from Microsoft, Google, and Facebook, its bank balance of just $3 million might need topping up in order to keep ahead of rivals’ workplace “productivity” software.

The bigger picture: Tech disruption tends to cut out middlemen.

Big startups have revolutionized industries, cutting out middlemen.

• While Uber ultimately followed a more traditional IPO route this year, it’s perhaps no surprise that Slack went a step further by cutting out financier middlemen.
• Spotify’s stock has fallen 10% since listing, however – and other firms mulling a direct listing will be keeping an eye on Slack’s performance.

Content source: Finimize. (2019) Picking Up The Slack. Available from: https://www.finimize.com/wp/news/picking-up-the-slack/ [Accessed 22 June 2019]