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George Ammar Explains Spotify’s Direct Listing

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For George Ammar, it only seemed a matter of time until music-streaming giant Spotify became a public company like other big tech companies. However, many investors and market watchers were surprised by the Swedish company’s move to do a direct listing at the New York Stock Exchange instead of a traditional IPO. For those confused about the two, George Ammar explains their differences in this blog piece.

Direct Listing vs. IPO

In a direct listing, a company offers its shares to the public without the involvement of underwriters who are typically investment banks. One major part of the entire process is for the underwriters to arrive at an IPO price. A company that chooses to list does not have an IPO price, only a reference price. This reference price is deemed as the value of the company and that value is subject to the due diligence done by investors. One can see why an IPO price is needed, not just for the company that wants to go public and wants to protect its value, but for investors as well, as the study on the company’s fundamentals would have already been taken care of.

In the case of Spotify, George Ammar shares that the reference price is at $132. The reason why everyone can’t stop talking about Spotify’s unconventional move is the risk involved. The biggest risk with their direct listing is that the stock can trade lower if investors believe that they are worth much lower than the reference price. Conversely, Spotify can also be worth much more if investors think the opposite, buying Spotify shares on the NYSE, in turn boosting demand. How is the risk different with an IPO? George Ammar explains that companies that go down the traditional IPO path have allotted shares to protect the stock price. They have market makers who are tasked with managing the volatility in stock prices so the risk is minimized. As mentioned, the company’s fundamentals have been accounted for and reflected in the IPO price. It’s just that they do not have control over how investors will react to that price.

Another difference between a direct listing and an IPO is the roadshow. Normally, companies that want to go public do roadshows to educate investors about the company and why they should invest their money in them. George Ammar shares that the reason why Spotify passed up on a roadshow is that they believe the public is already familiar with the company and its product or service, which is music-streaming.

Which is Better?

Between doing a direct listing and an IPO, George Ammar answers that it’s ultimately up to the company how they want to go public. In the case of Spotify, aside from the savings, they realized that with doing away with underwriting services, the famous company likely has more leverage than others to do a direct listing because as mentioned, the public is familiar with what they do. Smaller companies likely do not have that kind of company recognition, and will, therefore, need an underwriter who will help them go through the entire process, from IPO price to roadshows.