You might think investment bankers would be skeptical — or even downright critical — of direct listings, the process Spotify and Slack used to go public instead of holding a traditional initial public offering.
After all, a direct-listing streamlines the process companies go through to get their shares listed. By design the process eliminates a lot of the work bankers usually perform — and much of their fees.
That may be so, but some of Bank of America's top tech bankers are embracing direct listings.
"We're actually a big proponent of" the process, said Neil Kell, Bank of America's global head of tech, media, and telecom equity capital markets. He continued, "We're all in."
The way Bank of America views public offerings — direct, traditional, or otherwise — is that they are just one transaction in what ideally will be a long-term relationship with corporate clients, said Gary Kirkham, global co-head of technology, media, and telecom investment banking for the company. The bank may make less money in the public offering process by helping out with direct listings, but doing so could engender good will that will benefit the bank later on.
"We want to have the relationship for the full period of that company," Kirkham said.
Silicon Valley is abuzz about direct listings
Kell and Kirkham spoke with Business Insider at the bank's Tech Innovation Summit in Silicon Valley's Menlo Park last week. Direct listings were one of the topics du jour at the event, which was attended by venture capitalists and startup founders.
At least in the United States, there have only been two prominent direct listings offerings to date — Spotify last year and Slack earlier this year. But the process has started to attract growing interest and attention, especially in Silicon Valley. Bill Gurley, a partner at Benchmark Capital, one of the leading venture capital firms, has championed direct listings and held an event earlier this month to highlight their benefits over IPOs.
In a traditional IPO, bankers help market a company's stock to institutional investors, who are the initial purchasers of its shares. The bankers line up buyers for the offering, which generally raises money for the company, and work with the company to determine the price at which the shares will begin trading.
Usually the bankers try to underprice the shares so that they jump, or pop, on their first day of trading, when the initial institutional buyers sell them to the general public. That pop rewards the IPO investors and can spark the interest of everyday investors, but it represents a giveaway of cash by the company, which isn't getting paid the market value for its shares.
For all their efforts as part of an IPO, banks typically receive a big fee.
In a direct listing, by contrast, a company's early investors sell shares directly to the public via the exchange they join. The company itself doesn't raise money in the offering, and its executives don't generally go on a so-called road show to meeting with prospective IPO investors. The price the selling shareholders get for their stock is basically determined by the market, rather than by the company's bankers, so there isn't necessarily a first day "pop" built in.
Because their role is much reduced in a direct listing process, the underwriting banks typically see a fraction of the fees they'd see in an IPO.
The Spotify and Slack offerings and Gurley's recent event have all sparked interest in direct listings, Bank of America's Kell said. Many of the bank's clients and potential customers have been reaching out to it lately about the process, he said.
"The level of dialog has definitely picked up," said Kell.
Lots of companies could go public via a direct listing
Some IPO experts have been dubious that the direct-listing process will catch on widely. Few companies have the name recognition of Spotify or even Slack. Few also are as well capitalized; instead, many need to raise funds for themselves when they go public. There's also been some fear that investment bank's research divisions might shun companies that go public via direct listing, making it harder for them to generate interest in their shares.
But Kell argues direct listing could end up being used by a much wider swath of companies than skeptics expect. While many companies do use a public offering to raise money for themselves, that doesn't have to be done through a traditional IPO, he noted. Companies could sell shares to big investors in a private placement before or after a direct listing. Or they could do what many public companies do all the time — sell shares to the public after they are already listed.
And while the traditional IPO roadshow can be useful, companies have plenty of ways to market themselves to potential investors, Kell said. Spotify and Slack both gave presentations to potential investors via webcast prior to their offerings.
A direct listing is "a very viable solution for most clients," Kell said.
Airbnb is reportedly planning to go public via a direct listing next year. And Bank of America is working with "a couple" of companies that plan to go public next year via the same process, Kell said.
That's not to say that the industry will suddenly flip and all offerings will be done via direct listings. Both IPOs and direct listings have their benefits and drawbacks, and Bank of America sees its role as helping clients figure out which process best meets their needs, Kell said.
"Direct listings, I think, are an output of the debate that the whole ecosystem is having … (about) how do we fulfill more of the objectives of our clients via an appropriate process," he said.
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