Slack's Direct Listing: The Pros And Cons

Slack Technologies, the provider of a cloud-based workplace messaging app, launched its product in 2013 and plans to list its shares on the New York Stock Exchange June 20 through a direct listing.

The company will trade under the ticker “WORK.”

The Pros Of Direct Listings

A number of benefits come with a direct listing versus an initial public offering.

A direct listing like the one Slack has planned for next week has three primary benefits, said Scott Coyle, the CEO of ClickIPO. 

“First, the company doesn’t have to pay a fee, typically 6 or 7%, to underwriters to raise the capital. So if the company says it is going to make $100 million worth of shares available, a direct listing can save a great deal in fees,” he said. 

The second advantage, Coyle said, is that typically when a company goes public via an IPO, the underwriters require a six-month lockup period for certain insiders and major shareholders. That means they have to wait until after the shares trade for six months before they can sell.

“So if a stock is priced at $20 and initially goes up to $25, but then drops to $15 or $12, six months later, they lose out on the opportunity to sell at a higher price," he said. "One benefit of a direct listing is that existing shareholders do not have to wait six months to trade shares." 

The third: a direct listing provides a “fairer market” to participate in at the outset, because anyone — from the general public to institutions — can buy the stock at the same price whenever it opens for trading, the ClickIPO CEO said. 

“With an IPO, the underwriters select who gets allocations of shares, meaning they decide who can get in on the initial offering price. This problem is part of what we’re trying to solve at ClickIPO, by creating access to IPOs for all investors." 

The Cons 

Direct listings bring two notable downsides, Coyle said. 

First: the company isn’t raising any additional capital.

“Typically, going public offers a great opportunity to raise money for the business, so companies miss out on that chance when they do a direct listing. However, Slack doesn’t seem to need any more capital, so it’s not an issue for them," he said. 

The other negative aspect of a direct listing is that initial trading can be more volatile, as institutional buyers have not gone through a price discovery process to set the initial IPO price.

“With a traditional IPO, there’s a book-building process where major investors and institutions set the value of a company at a certain price, creating a benchmark for what that company is worth before it trades,” Coyle said. 

Related Links: 

Slack Is Heading To The Public Market