After several delays, Spotify, the world's largest streaming music service provider, was finally finalized on the New York Stock Exchange in the first week of April under the ticker symbol "SPOT."
This is probably the largest technology company listed in the US this year without a traditional IPO, but in an alternative way to direct listing (Direct Listing).
On March 15, Spotify announced that it will release its full-year financial guidance on March 26, and will be publicly listed on the NYSE from April 3. On the same day, the company also held Investor Day, which promoted the company's business and prospects on the one hand, and communicated with investors in advance on the other hand, and explained the uncertainty contained in the direct listing model to ensure its smooth landing. Exchange office.
In recent years, the size of the US private equity market has developed rapidly and its influence has gradually expanded. Most of the US tens of billions of US dollar market value unicorn companies have avoided public listing and chose to trade in the private equity market.
Santosh Rao, an analyst at venture capital firm Manhattan Venture Partner, said that if Spotify's direct listing is successful, unicorn companies such as Airbnb and Uber will also consider public offerings in this way.
Manhattan Venture Partner has bought Spotify shares in the secondary market that provides private equity trading.
Low cost direct listing
Founded in 2006, Swedish company Spotify is the undisputed leader in streaming music, with more than 150 million monthly active users worldwide. As of December 31, 2017, the number of paid subscribers reached 71 million, with an annual growth rate of 46%, which is twice the number of Apple Music users.
According to the prospectus published by the US Securities and Exchange Commission (SEC), the company's revenue has increased year by year, with revenue of $2.37 billion in 2015, revenue of $3.6 billion in 2016, and revenue of $4.99 billion in 2017. It has increased by 39% a year.
Despite the rapid growth in revenue, the Spotify loss is also a fact. In 2017, the company's net loss reached $1.5 billion. The reason for the loss is the need to pay a huge amount of copyright fees to the music copyright party. As of the end of 2017, Spotify had paid a total of more than $9.76 billion in copyright fees to music copyright holders, while also facing a $1.6 billion copyright lawsuit, which is still pending in federal court in California.
Unlike other companies' traditional IPOs, Spotify uses a direct listing model that does not issue new shares or raise funds through the listing process, nor does it require an underwriter. Simply register existing stocks and trade freely in the capital markets.
Chen Dong (a pseudonym), a private equity fund manager in Shanghai, said in an interview with the International Finance News: “When a company is preparing to list in the US, the company needs to hire one or more investment banks as underwriters to negotiate stocks with them. Issues, dates, issue prices, issue fees, etc., for a longer period of time, usually 1 to 2 years, and higher costs. After the stock is issued, the early investors or institutional investors are subscribed before the public In the traditional underwriting process, the underwriters set the issue price according to the actual needs of the institutional investors for the initial public offering, and the underwriters begin to sell the shares to the public shareholders according to the issue price, and the general underwriters will lower the issue price in the process. If the company's stock is oversubscribed, the underwriters' fees will be higher. Direct listing will allow the company's stock to be sold directly to the public. The process is simple, saving up to hundreds of millions of dollars in underwriting expenses, and preventing stock dilution, etc. Problems, reducing the cost of listing."
Chen Dong pointed out that the direct listing also has the advantage of avoiding the “lock-up period†of traditional IPOs. There is no restriction on the shares held by existing shareholders of the company, and shareholders can sell all the shares at one time.
The SEC stipulates that after the traditional IPO, the original shareholders may not sell their stocks for a certain period of time to cash in the secondary market. The NYSE and Nasdaq have a “lock-up period†of six months. After 6 months, the amount of shares that shareholders can sell every three months cannot exceed 1% of the same issued shares or the largest average transaction volume within 4 weeks, and must be reported to the SEC in advance.
In addition, the traditional IPO needs to disclose the entire financial situation to the investment bank and then disclose it to the public, but the direct listing can only be announced 15 days before the official listing. The SEC also stipulates that in traditional IPOs, companies must maintain a period of silence, but direct listings are different, and company executives can publicly discuss the company before listing.
Although direct listing has many advantages, the lack of an “inquiry loop†process means that there is no traditional opening price discovery mechanism, and the issue price will be determined by the market supply and demand situation.
It is understood that Spotify will hire Morgan Stanley as a financial advisor, the listing opening price will be determined by the NYSE based on the purchase and sale orders made through the securities brokerage company, the price of the buy and sell orders on the NYSE.
Since there is no pre-recruitment of subscribers and set prices, the stock price is likely to fluctuate wildly on the first day of trading. Spotify also stated in the prospectus: "Our common stock price may be more volatile than the underlying IPO share price. And after listing on the New York Stock Exchange, the stock price may fall rapidly."
"Business Insider" analysis, Spotify dare to go public in this way, because of their huge brand awareness and very high private market valuation. In 2017, the company's stock in the secondary market was 12.8 million shares, with a valuation ranging from $6.3 billion to $20.9 billion. Since the beginning of this year, the company's stock has 2.8 million shares in the secondary market, with valuations ranging from $15.9 billion to $23.4 billion. While the direct listing approach has made the company's reasonable valuations confusing, it is certain that a valuation of around $22 billion gives Spotify a direct listing.
In addition, direct listing also helps Spotify handle the tough debt structure. In 2016, Spotify raised $1 billion in funds from private equity firms such as TPG and Dragoneer by issuing convertible bonds. According to the agreement signed at the time, if Spotify's initial public offering was postponed, these private companies could convert corporate bonds into stocks at a high discount. Market analysts say this is also the main reason Spotify is looking for a quick time to market. However, depending on the transaction details, if Spotify chooses to go public, it will not trigger the conversion mechanism.
Chen Dong believes that in the case of a company's losses, there is still a possibility that the traditional IPO will not issue new shares. The founder does not want to dilute his own equity, but he needs to find a way for current employees, former employees, early investors, etc. Provide opportunities for stocks to be realized.
According to the file that Spotify submitted to the SEC, in order to consolidate the founder's position in the company, Spotify proposed a voting certificate called “beneficiary certificatesâ€. After the voucher is assigned, the two founders will own more than 80% of the company's voting rights. As a result, the two founders who have retained the voting rights still have the power to decide on the company's execution operations. Even if the company has a serious loss, the founder can still do the company.
NYSE amends listing rules
According to Steven Kaplan, a professor at the University of Chicago's Booth School of Business, the number of US-listed companies has fallen by nearly 50% from 8,616 in 1997 to 4,633 in 2016. In the past ten years, for many large unicorns, the problem of public listing has outweighed the benefits, and the disadvantages outweigh the benefits, which have become less attractive.
On the NASDAQ Stock Exchange in 2014, the private company's stock exchange market was opened, allowing private companies that are in the development stage to also receive funding from institutional investors. Similar private stock exchanges include SecondMarket, AngelList, and Funders Club. WeFunder and Equidate, etc., allow private companies to finance a wider range of investors, not just traditional venture capital firms.
As trading sites such as Nasdaq provide technology and platform support for private equity transactions, many potential startups are vulnerable to low-cost financing. The capital and liquidity of the private equity market are fully able to meet the financing needs of startups.
In addition, Nasdaq has been a popular listing place for many technology companies. Apple, Google, Microsoft, Amazon, Facebook and other high-tech companies with high market capitalization are listed on NASDAQ. Since the 1980s and 1990s, the New York Stock Exchange has focused on older, more mature blue-chip stocks, making it the preferred location for companies in industries such as industry, energy, and banking. Due to its strict size and financial constraints, it has blocked emerging technology companies' IPOs on the NYSE.
The number of IPOs continues to decline, and it is difficult to attract outstanding science and technology companies to go public and other issues have attracted the attention of the NYSE.
In order to enhance competitiveness, the NYSE submitted a proposal to the SEC to amend the listing process in March 2017 to improve its listing standards. One of them is to meet a unicorn company like Spotify that seeks direct listing. In early February of this year, the NYSE’s proposal to allow companies to go public directly was approved by the SEC.
New choice for unicorn listing
According to a research report released by Deloitte, the current global unicorn companies are distributed in 22 countries. As of the end of June 2017, there are 252 non-listed companies in the world with a valuation of more than 1 billion US dollars, and the total value of the valuation reached 879.5 billion US dollars. The number of American unicorns ranks first, accounting for 42.1% of the world. The number of Chinese unicorns is close behind, accounting for 38.9% of the world.
According to data from the Wall Street Journal, there are currently 169 unlisted technology start-ups with a valuation of more than $1 billion, an increase of 72% from three years ago.
De Clark, head of capital markets at Deutsche Bank Technology, said that the number of technology companies preparing for this year's IPO will be around 50 to 60.
In the history of the United States, there are very few cases of direct listings. Previously, they only appeared on the Nasdaq Stock Exchange, and were limited to small companies that are not well-known, such as Ovascience (market value of 55 million US dollars), Nexeon MedSystems, Coronado Biosciences, Biotechnology and life sciences companies such as BioLine Rx (market value $83 million). Spotify was the first big company to choose an alternative IPO, and neither Hong Kong shares nor A shares appeared.
According to the analysis, since there is no underwriter to support the stock price, the risk of the stock of the directly listed company will fall after listing. If Spotify's stock price volatility is not very large, it will encourage high-value, cash-rich companies such as Airbnb to choose to go public.
John Tuttle, head of the global public company on the New York Stock Exchange, has said that for companies with sufficient capital, what they really need is liquidity. Direct listings may attract more companies that trade on the relatively loose OTC market but want to land on the NYSE or Nasdaq exchange.
For investors, direct listing means that everyone is equal. Vince Rivers, senior portfolio manager at JO Hambro, said, “As a small investment company, direct listing is more beneficial to us because we are currently at the same starting line regardless of the size of the investment.â€
Spotify's direct listing is closely watched by Wall Street and Silicon Valley. Investors and market observers point out that even if Spotify's direct listing is successful, this approach is not suitable for any company, but is more suitable for companies with high visibility, good evaluation, and business models that are familiar to institutional and retail investors. In general, investment bank support is a strong support for a new listed company.
According to people familiar with the matter, Airbnb is currently watching Spotify's performance to consider whether to choose direct listing.
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