THE FIRST DEGREE VIEW



Out damn Spotify!

Stephen Fisher - Friday, February 02, 2018
"Without underwriters, Spotify shares won’t debut with a price based on investor feedback, with buyers lined up." Bloomberg January 4, 2018.

Spotify, the digital music platform, intends to list publicly this quarter.  Instead of an Initial Public Offering, where the company simultaneously lists its shares and raises capital at the same time, Spotify intends to just start trading on the NYSE one day.  IPO's are major events involving Investment Banks (IBs) whose job is to place the new issue with investors, sometimes underwrite the deal and generally to make a lot of noise. For their troubles, the Investment Bank will typically charge a 7% fee on the capital raised during the IPO. Spotify has been valued in the private market at $13billion and therefore intends to cut out the Investment Banking fees associated with their listing.

Needless to say the IB community are aghast at the potential challenge that Spotify's listing route poses to their franchise.  The average IPO is underpriced by about 15%, which means that those IB clients who are fortunate enough to receive an allocation profit by about 15% at listing. Spotify see this as a gift from their existing owners to the IB's clients which, for each $1billion raised in an IPO, amounts to a gift of $150million.  Advising on an IPO is not actually risking your own money, so Spotify think that the money is probably better spent rewarding their existing shareholders for their loyalty.

The IB community have mounted a campaign to question and derail Spotify's disruptive approach and the Bloomberg quotation is an example of the fear being whipped up. The statement that "...Spotify shares won't debut with a price based on investor feedback..." however, is pure air.  It implies that  the IB monopolises the ability to value a company and that the final investors on the buy-side are just dumb animals who are incapable of understanding valuation.  Corporate advisors who think they are indispensible need only look at the software developers who now occupy the desks where their sales and trading buddies used to sit to realise what is coming.  The buy-side are not dumb animals, they are risk-takers and Spotify have decided to cut out the sell-side ipo-sideshow in favour of a listing method which shifts the pricing responsibility directly to the final investors. Just as the final buy-side investor has benefited from tighter bid/asks as computers replaced traders, the buy-side will benefit from the disintermediation of new listings.

How would Spotify's approach to listing work? Rather than opening up 15% over the placement price, the market will open with an electronic auction.  Buyers and sellers willing to express a bid or offer are matched off until the market clears and settle at the average average price.  After that, the market is left to trade according to order flow. My prediction is that it will only take a few minutes before a price is discovered and a few days for it to be reinforced with two-way volume flow.  If I am right and an orderly market is established without the IB, then the expensive razz-matazz surrounding the IPO process will have been exposed as a fiasco. This will prompt every prospective public listing candidate to consider the same approach. We may never witness a traditional IPO ever again!

In Shakespeares play Macbeth, Lady Macbeth famously uttered "out damn spot'' while haunted by the apparition of blood stains on her hands over the murder of the King. A lot of Bankers are similarly haunted by the prospect of their IPO gig being disrupted... "Out damn Spotify"!
Comments
Peter Horn commented on 03-Feb-2018 06:51 PM
So true... their motivation for shifting their capital structure from private equity to public equity is not typical, so why have a typical IPO? They don't need IB to drum up interest... they are already widely known and presume latent demand. But this doesn't mean many others can do the same. It might just be for the unicorns.

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