Like other industries, the IPO market is seeing its fair share of disruption. The recent high-profile public listings of tech firms Palantir and Asana is clear evidence of the change that is afoot. The tech unicorns created a buzz when they opted for the direct listing path to the public market in September, eschewing the more traditional initial public offering alternative.
So far, only two other notable firms have chosen the direct listing model. The first is Swedish music streaming giant Spotify Technology, which went public through direct listing in 2018. Collaboration software company Slack Technologies used the same manoeuvre in 2019.
It’s widely speculated that the unconventional approach taken by data mining company Palantir and workplace management software firm Asana could pave the way for other private firms to take what some regard as a radically different road to Wall Street.
So, what is direct listing and why are more companies taking this non-traditional route to going public? There’s plenty to unpack about direct listing and the implications for investors.
What is direct listing?
Direct listing is a method for a private company to go public in which it starts to trade without issuing shares at a set offer price, says Jay Ritter, an IPO expert and finance professor at the University of Florida. “Instead, on an appointed day, existing shareholders supply shares and investors demand shares, with a designated market maker determining the price at which supply equals demand for the opening trade,” he says.
Both Asana and Palantir appointed Citadel Securities as their designated market maker and Morgan Stanley as their main financial adviser for their stock market debuts.
Direct listing increases liquidity for existing shareholders and is usually cheaper than an IPO, says Dan Morgan, vice president and senior portfolio manager at Synovus Trust. "The process makes existing stock owned by employees and investors available for the public to buy and does not require underwriters or a lock-up period," he says.
It also means the company performing a direct listing does not raise capital or sell shares, or go through a book-building process, to make their shares available for public trading, says Mark Cash, an equity analyst at Morningstar. Instead, employees and early investors are simply able to sell their stock holdings when trading begins on the first day.
A direct listing makes existing stock owned by employees and investors available for the public to buy and does not require underwriters or a lock-up period
Why do companies take that route?
There are several reasons why companies choose direct listing. The most common ones include a quicker process, lighter regulatory scrutiny and, most importantly, saving a tonne of money in investment banking fees. “Direct listing helps companies avoid hefty fees paid to investment banks,” says Mr Morgan. “Unlike an IPO, in which the share price is negotiated beforehand, in a direct listing, the price of the stock depends solely on supply and demand.”
A traditional IPO, wherein an investment banking firm or firms act as intermediaries and set the offer price, is simply too expensive. “In the US this year, the average fee has been $25 million, and the average price change on the first day, measured from the offer price to the closing price, multiplied by the number of shares offered, has been $175 million,” says Mr Ritter. He refers to this number as the “money left on the table”.
Adding up all the costs of going public gets a total of $200 million, says Mr Ritter.
In a traditional IPO, a company issues additional shares of stock, which can reduce both the value of existing investors’ shares and their proportional ownership of the company, a process known as dilution. Direct listing allows existing stockholders to sell their stock without its value getting diluted by new shares created in an IPO.
Direct listing vs IPOs
The major difference between a direct listing and an IPO is that the former sells existing stocks while the latter issues new shares. “The goal of companies that become public through a direct listing is not focused on raising additional capital, which is why new shares are not necessary,” says Mr Morgan.
In a traditional IPO, an underwriter determines a price at which an IPO will be offered. The process is called book-building. “The investment banks fill a notebook with the orders from institutional investors and then recommend an offer price to the issuing firm,” says Mr Ritter.
There is usually excess demand at the offer price, fuelled by an expectation of initial pop. The investment bankers “generally give most of the underpriced shares to their most profitable clients”, Mr Ritter says, pointing out that many of these clients are hedge funds that compete to be a highly profitable client by overpaying the fees on other trades. “Thus, the investment bankers make money not only from the gross spread, but also from the overpayments that hedge funds give them on other trades.”
With direct listings, there are no underpriced shares to hand out, and “shareholders are able to sell at a higher price”, explains Mr Ritter.
Another difference is that the direct listing process does not have the lock-up period that applies to IPOs.
Reference price vs IPO price
A reference price and IPO price are price points at which the stock will begin trading. “The reference price in a direct listing is largely based on the prices at which recent private market transactions have occurred to give some guidance to potential investors about what to expect,” says Mr Ritter.
In general, no shares change hands at the reference price. By contrast, with the offer price of an IPO, that is the price at which shares trade.
Morningstar’s Mr Cash says it’s the stock exchange that sets the reference price, historically looking at past private transactions, but adds “this value is not the price at which the direct listing will begin trading”.
An IPO price, on the other hand, is determined in the book-building process and is the price that company sells to institutional investors. “Then there’s the listing price of the stock price when trading starts for public,” Mr Cash adds.
What does this mean for investors?
“A direct listing allows potential investors to participate in an issuance of stock without all the hype from an underwriter,” Mr Morgan says. “Underwriters typically allocate shares of ‘hot’ IPOs to their top clients, forcing interested buyers to purchase shares in the secondary market at a higher price than the insiders.”
With both traditional IPOs and direct listings, once the stock starts trading, there are no free lunches
On the flip side, a direct listing, creates a level playing field that gives all potentials buyers an equal shot at buying stock at the reference price, Mr Morgan says.
“With both traditional IPOs and direct listings, once the stock starts trading, there are no free lunches,” Mr Ritter says. An investor should only buy if they think that the price is right, he adds.
One key benefit of direct listings, Mr Cash says, is that “investors have access to more companies that could have possibly stayed private for a longer period of time”.
Could direct listings buck the IPO trend?
Some market observers feel if Asana and Palantir succeed with the direct listing route, they could open the doors for other private companies looking to make their way to stock markets.
However, it’s too early to say if the recent direct listings could alter the IPO landscape, says Mr Morgan. “[The] jury is still out on the direct benefits of direct listing versus an IPO, [but] my initial thoughts on the Palantir and Asana direct listings is that even though both stocks traded above their reference prices, neither stocks soared to the heights of Snowflake and JFrog IPOs weeks before,” he says.
All four stocks were software companies but Snowflake and JFrog rose substantially higher than their IPO prices. Historically, while Spotify was a success, Slack has been a disappointment, even though both took the direct listing road to the market, Mr Morgan says.
Ultimately, direct listings or merging with a special purpose acquisition company give companies alternatives to an IPO. “The investment bankers will have to make traditional IPOs cheaper, or private companies will use these alternative methods of getting listed,” Mr Ritter claims.
Mr Cash appears more sanguine that the direct listings trend could take hold. “I’d expect direct listings to be more prevalent as firms become more comfortable with the practice and [stock] exchanges embrace the notion,” he says.
Going public is an effective way for companies to evolve and grow. An IPO no longer provides them the only path to go public. The highly anticipated market debuts of Airbnb, Robinhood and DoorDash will be closely watched both by investors and other private companies waiting in the wings.
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Coffee: black death or elixir of life?
It is among the greatest health debates of our time; splashed across newspapers with contradicting headlines - is coffee good for you or not?
Depending on what you read, it is either a cancer-causing, sleep-depriving, stomach ulcer-inducing black death or the secret to long life, cutting the chance of stroke, diabetes and cancer.
The latest research - a study of 8,412 people across the UK who each underwent an MRI heart scan - is intended to put to bed (caffeine allowing) conflicting reports of the pros and cons of consumption.
The study, funded by the British Heart Foundation, contradicted previous findings that it stiffens arteries, putting pressure on the heart and increasing the likelihood of a heart attack or stroke, leading to warnings to cut down.
Numerous studies have recognised the benefits of coffee in cutting oral and esophageal cancer, the risk of a stroke and cirrhosis of the liver.
The benefits are often linked to biologically active compounds including caffeine, flavonoids, lignans, and other polyphenols, which benefit the body. These and othetr coffee compounds regulate genes involved in DNA repair, have anti-inflammatory properties and are associated with lower risk of insulin resistance, which is linked to type-2 diabetes.
But as doctors warn, too much of anything is inadvisable. The British Heart Foundation found the heaviest coffee drinkers in the study were most likely to be men who smoked and drank alcohol regularly.
Excessive amounts of coffee also unsettle the stomach causing or contributing to stomach ulcers. It also stains the teeth over time, hampers absorption of minerals and vitamins like zinc and iron.
It also raises blood pressure, which is largely problematic for people with existing conditions.
So the heaviest drinkers of the black stuff - some in the study had up to 25 cups per day - may want to rein it in.
Rory Reynolds
Red flags
- Promises of high, fixed or 'guaranteed' returns.
- Unregulated structured products or complex investments often used to bypass traditional safeguards.
- Lack of clear information, vague language, no access to audited financials.
- Overseas companies targeting investors in other jurisdictions - this can make legal recovery difficult.
- Hard-selling tactics - creating urgency, offering 'exclusive' deals.
Courtesy: Carol Glynn, founder of Conscious Finance Coaching
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Rufus Thomas, Bear Cat (The Answer to Hound Dog) (1953)
This rip-off of Leiber/Stoller’s early rock stomper brought a lawsuit against Phillips and necessitated Presley’s premature sale to RCA.
Elvis Presley, Mystery Train (1955)
The B-side of Presley’s final single for Sun bops with a drummer-less groove.
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Carl Perkins, Blue Suede Shoes (1956)
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Roy Orbison, Ooby Dooby (1956)
An essential piece of irreverent juvenilia from Orbison.
Jerry Lee Lewis, Great Balls of Fire (1957)
Lee’s trademark anthem is one of the era’s best-remembered – and best-selling – songs.
What it means to be a conservationist
Who is Enric Sala?
Enric Sala is an expert on marine conservation and is currently the National Geographic Society's Explorer-in-Residence. His love of the sea started with his childhood in Spain, inspired by the example of the legendary diver Jacques Cousteau. He has been a university professor of Oceanography in the US, as well as working at the Spanish National Council for Scientific Research and is a member of the World Economic Forum’s Global Future Council on Biodiversity and the Bio-Economy. He has dedicated his life to protecting life in the oceans. Enric describes himself as a flexitarian who only eats meat occasionally.
What is biodiversity?
According to the United Nations Environment Programme, all life on earth – including in its forests and oceans – forms a “rich tapestry of interconnecting and interdependent forces”. Biodiversity on earth today is the product of four billion years of evolution and consists of many millions of distinct biological species. The term ‘biodiversity’ is relatively new, popularised since the 1980s and coinciding with an understanding of the growing threats to the natural world including habitat loss, pollution and climate change. The loss of biodiversity itself is dangerous because it contributes to clean, consistent water flows, food security, protection from floods and storms and a stable climate. The natural world can be an ally in combating global climate change but to do so it must be protected. Nations are working to achieve this, including setting targets to be reached by 2020 for the protection of the natural state of 17 per cent of the land and 10 per cent of the oceans. However, these are well short of what is needed, according to experts, with half the land needed to be in a natural state to help avert disaster.
Benefits of first-time home buyers' scheme
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Director: Christian Schwochow
Starring: George MacKay, Jannis Niewohner, Jeremy Irons
Rating: 3/5
David Haye record
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Wins by KO: 26
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Our legal consultant
Name: Dr Hassan Mohsen Elhais
Position: legal consultant with Al Rowaad Advocates and Legal Consultants.
Our legal columnist
Name: Yousef Al Bahar
Advocate at Al Bahar & Associate Advocates and Legal Consultants, established in 1994
Education: Mr Al Bahar was born in 1979 and graduated in 2008 from the Judicial Institute. He took after his father, who was one of the first Emirati lawyers
Key findings of Jenkins report
- Founder of the Muslim Brotherhood, Hassan al Banna, "accepted the political utility of violence"
- Views of key Muslim Brotherhood ideologue, Sayyid Qutb, have “consistently been understood” as permitting “the use of extreme violence in the pursuit of the perfect Islamic society” and “never been institutionally disowned” by the movement.
- Muslim Brotherhood at all levels has repeatedly defended Hamas attacks against Israel, including the use of suicide bombers and the killing of civilians.
- Laying out the report in the House of Commons, David Cameron told MPs: "The main findings of the review support the conclusion that membership of, association with, or influence by the Muslim Brotherhood should be considered as a possible indicator of extremism."
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Europe’s rearming plan
- Suspend strict budget rules to allow member countries to step up defence spending
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- Create a savings and investments union to help companies access capital
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Email sent to Uber team from chief executive Dara Khosrowshahi
From: Dara
To: Team@
Date: March 25, 2019 at 11:45pm PT
Subj: Accelerating in the Middle East
Five years ago, Uber launched in the Middle East. It was the start of an incredible journey, with millions of riders and drivers finding new ways to move and work in a dynamic region that’s become so important to Uber. Now Pakistan is one of our fastest-growing markets in the world, women are driving with Uber across Saudi Arabia, and we chose Cairo to launch our first Uber Bus product late last year.
Today we are taking the next step in this journey—well, it’s more like a leap, and a big one: in a few minutes, we’ll announce that we’ve agreed to acquire Careem. Importantly, we intend to operate Careem independently, under the leadership of co-founder and current CEO Mudassir Sheikha. I’ve gotten to know both co-founders, Mudassir and Magnus Olsson, and what they have built is truly extraordinary. They are first-class entrepreneurs who share our platform vision and, like us, have launched a wide range of products—from digital payments to food delivery—to serve consumers.
I expect many of you will ask how we arrived at this structure, meaning allowing Careem to maintain an independent brand and operate separately. After careful consideration, we decided that this framework has the advantage of letting us build new products and try new ideas across not one, but two, strong brands, with strong operators within each. Over time, by integrating parts of our networks, we can operate more efficiently, achieve even lower wait times, expand new products like high-capacity vehicles and payments, and quicken the already remarkable pace of innovation in the region.
This acquisition is subject to regulatory approval in various countries, which we don’t expect before Q1 2020. Until then, nothing changes. And since both companies will continue to largely operate separately after the acquisition, very little will change in either teams’ day-to-day operations post-close. Today’s news is a testament to the incredible business our team has worked so hard to build.
It’s a great day for the Middle East, for the region’s thriving tech sector, for Careem, and for Uber.
Uber on,
Dara
COMPANY PROFILE
Initial investment: Undisclosed
Investment stage: Series A
Investors: Core42
Current number of staff: 47
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EA Sports FC 25
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MATCH INFO
Manchester United 1 (Rashford 36')
Liverpool 1 (Lallana 84')
Man of the match: Marcus Rashford (Manchester United)
BMW M5 specs
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Price: base / as tested: Dh382,000
Engine: 5.6-litre V8
Gearbox: Seven-speed automatic
Power: 428hp @ 5,800rpm
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Fuel economy, combined: 12.7L / 100km
