A Change of Tune for IPOs?

The leaders at Spotify thought something as basic as listening to music could be successfully turned on its head. This week they’re seeing if a process that’s a little more complex, selling shares to investors, could also be altered. 

The world’s largest streaming music service has its initial public stock offering, or IPO, on Tuesday. But instead of having the sale managed by investment bankers—which is what nearly every large firm does when it first goes public—Spotify is selling its shares directly to investors. If the IPO goes well (its shares opened at $165.90 each, well above the offering price) it could make the company worth about $30 billion while saving the company millions in Wall Street fees. Plus, a successful direct-to-investor IPO could convince other private firms to go down the same route. “We have technology disrupting every single thing we do in life, and this IPO is a metaphor as to how Wall Street needs to adapt,” says Noah Schwarz, senior client partner in Korn Ferry’s Financial Services practice. 

It’s a bold move, creating another wrinkle other finance leaders ay need to consider, albeit with risks. With no investment bank to manage the process and set the initial stock price, the share price could soar, or plunge, as brokers try to balance buyers and sellers, at least at the beginning. Also, existing investors, with few exceptions, don’t have to wait to sell their shares. “It’s a more efficient way to come to market, but it is going to be a volatile way,” says Jack Ablin, chief investment officer at wealth management firm Cresset Wealth Advisors in Chicago. Traditional IPOs have had early volatility, too, but it was usually only in one direction, up.

Innovations in stock trading aren’t new, of course. In the 1970s fixed trade commissions on the NYSE gave way variable ones. In the 1990s, the massive banking firms had to change their ways when boutique mergers advisory companies arrived. “Just look at the stock exchange; everything is electronic now,” Schwarz says. “I remember the hundreds of people that used to work there, but that doesn’t exist anymore.”

 However, a fundamental change in how stocks are brought to market could be particularly of interest to chief financial officers worldwide. A direct listing could eliminate millions in banking fees and make raising capital less costly. Of course, that interest could wane if Spotify’s IPO starts poorly. “If this is a flop, then people will be more skeptical,” says Schwarz. 

A deeper also remains: how do you judge the IPO? “It will have been a success if the stock price jumps and stays high,” he says. That will help the company if it wants to raise capital with another share offering in the future.