When a privately owned company decides to list its shares on a public exchange. it is expected to follow the rules.
What rules? Well, for starters, the company is expected to hire an investment bank to guide it through the legal process. The bank also organizes promotional presentations for company representatives to “pitch” to potential investors. And perhaps most importantly, the bank underwrites the transaction by placing a value on the stock and then guaranteeing that the firm will receive that value during the sale.
The underwriting guarantee can be a risky proposition for banks. But by charging lucrative fees, the financial institutions can afford the risk of a massive financial obligation if the investors pay far less than expected.
Spotify, the streaming music provider that has disrupted the entertainment industry, is about to disrupt the investment banking industry by refusing to follow these rules. What does it intend to do? And why is it so daring?
The firm is not hiring an investment bank to provide any IPO services. Instead, by using an obscure “direct listing” process that has never been attempted by an organization of its size, Spotify simply intends to notify the New York Stock Exchange that it wishes to begin trading its shares.
No bank will organize any promotional presentations. None will provide any legal guidance, and none will be paid any fees. Perhaps most notably, none will provide Spotify with an underwriting guarantee.
For Spotify, this “direct listing” gambit is a reflection of its daring management style. Namely, it seeks to disrupt entire industries by eliminating the middlemen and by contracting with stakeholders directly.
In the music industry, for instance, the firm has dared to contract with the public while eliminating CD, DVD, and vinyl retailers. And now, on Wall Street, it is daring to attempt to reach investors while eliminating investment banks.
If Spotify succeeds, two different industry sectors will be disrupted by its daring strategy. Considering the buoyancy of today’s financial markets, it may prove foolish to bet against them.