Spotify Will Go Public With An Unusual IPO Model—Will It Work?
Spotify has, without a doubt, become one of the most popular music streaming services around the world. The company has 60 million paying subscribers, has just renegotiated a licensing deal with three major record labels and is currently valued at a whopping $15 billion.
Naturally, a company this huge and a brand this influential caused waves when it announced last year that it will go public.
But like all things millennial, Spotify is going about their initial public offering (IPO) in a very unconventional way—Spotify is listing directly on the New York Stock Exchange by late March or early April. It will become the biggest company to go public through direct listing and is also a first for the NYSE to do so since direct listings happened before over at Nasdaq. So what’s up with that? This is very much different from a traditional IPO because of three main things.
One, that Spotify will not be using an investment bank to set an initial price for their stocks, which means that they will be saving up to $300 million in fees that companies going on traditional IPOs pay investment banks to market and sell their shares.
Two, Spotify will not be issuing out new shares. It just wants to make more money for its current investors. This also means that unlike traditional IPOs where shares are available to the general public, Spotify’s shares can only be traded by institutional investors. It’s a move generally done by small-cap companies, mostly those in biotech and life sciences.
Three, that everything is simpler, essentially. It’s easier profit for Spotify’s investors, and it’s easier for their price to fluctuate, as well, since there are no safeguards like long-hold investors in place.
It’s a very unusual move for huge companies that even bankers are at a loss at what Spotify is planning to do. It’s a huge risk for Spotify to take, taking into account the scale of the company and the volatility of the market. Add to that the fact that Spotify may be earning but not yet profiting, and the IPO is seen only as a way for the investors to cash out.
According to NPR’s interview with George G.C. Parker, a finance professor at Stanford Graduate School of Business, “It's like saying, 'I got the coolest house on the block. Everyone will want to buy it, so why give a cut to a broker?’ To me, that is very analogous to a person that puts a sign out on the street and says 'this property is for sale by owner.’ Spotify, by doing this, is very confident that the public already understands Spotify's value, and that it does not need others to tell the story.”
But then, that’s the thing. If Spotify actually pulls it off, it’s going to be a game-changer in the Wall Street.