June 20, 2019 / 8:57 PM / a month ago

Breakingviews - Slack debut takes direct listing closer to a trend

The Slack Technologies Inc. CEO Stewart Butterfield rings the opening bell at the New York Stock Exchange (NYSE) during the company's direct listing in New York, U.S. June 20, 2019. REUTERS/Brendan McDermid

NEW YORK (Reuters Breakingviews) - Slack Technologies is onto something. The workplace-messaging service’s direct listing turned into a blowout when its shares started trading on Thursday. Airbnb could be next – and that could make the direct listing process almost mainstream.

Once free to trade, Slack’s shares soon topped $40 apiece – well above the so-called reference price of $26 provided by the New York Stock Exchange on Wednesday, though that doesn’t carry the kind of weight an initial public offering price does. At $40 a share, the company is valued at an eye-watering $24 billion based on a share count including options and stock awards, more than three times its worth in a private fundraising just a year ago.

Slack, which wraps up chat and other functions like sharing spreadsheets, is popular and revenue is growing at a fast clip, nearly doubling to $400 million for the year ended in January. The negatives are a huge cash burn, a lack of profit and vulnerability to rivals like software titan Microsoft.

If Spotify Technology is any guide – also fast-growing with no profit in sight – Slack could be fine. When the Swedish music-streaming service went public last year, there was a concern that a direct listing, which bypasses the roadshow and investor back-and-forth required for an IPO, would sow chaos. That didn’t play out. From the close on April 3, 2018, its first day trading, through Wednesday Spotify’s shares are about unchanged.

One drawback to a direct listing is that no capital is raised. But many private firms these days suck in lots of cash before they go public. If they have enough, the advantages are many. There’s no need to persuade anyone to buy new shares or not to sell the ones they already own, and the fees due to bankers are far lower. Slack is shelling out some $22 million, compared for example to the $85 million paid to underwriters for the IPO of disappearing-message app owner Snap.

Airbnb is another possible candidate, according to a Reuters source. The home-sharing app has money in its coffers after raising more than $4 billion, by CrunchBase’s tally. And the brand is recognizable so skipping the traditional investor marketing won’t hurt it. 

Two successful direct listings could be a coincidence. A third would mark the start of a trend.

Breakingviews

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