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Spotify's unorthodox route to market

Daniel Ek, the chief executive of streaming service Spotify, is clearly a master of understatement.
In a blog published ahead of the company's stock market flotation today, he warned employees and customers: "I have no doubt there will be ups and downs."
That is certainly likely to be the case in shares of this business. Markets are choppy enough right now, particularly in shares of technology companies, following Donald Trump's recent public sabre-rattling against the likes of Amazon.And Spotify is taking things one step further with a very unorthodox approach to floating on the stock market.Normally with an Initial Public Offering (IPO), companies coming to market hire investment banks to advise on the process, organise a roadshow with would-be investors and help market the shares.Crucially, these banks also "underwrite" the offer, meaning that they agree - at a price - to buy any shares that go unsold at the flotation. This ensures that there is stability in the market when the shares begin trading.In the case of Spotify, it has opted for a so-called "direct listing". It has hired Goldman Sachs, Morgan Stanley, and the boutique investment bank Allen & Company as financial advisers. But they will not be underwriting the issue as there are no new shares being sold.The shares will simply float on the New York Stock Exchange, with no banks to mop up any excess stock, no-one to set the share price via the underwriting process and no-one to allocate shares to investors.This approach will save Spotify tens of millions of dollars in fees. But it could mean trading in the shares will be exceptionally volatile as a result. The shares will simply find their own price, depending on how many buyers and sellers there are, while it could take some time for a price even to be established.
Spotify's unorthodox route to market

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Spotify has taken an unorthodox approach for its Wall Street debut
There's also another significant difference between Spotify's direct listing and the traditional IPO approach.Under the latter, existing shareholders and "insiders", such as executives, are usually subject to a lock-in period during which they are restricted from selling shares, typically for 180 days.This is to prevent the market being flooded with shares, but will not apply in this instance. Mr Ek, who owns 25.7% of the company, will be free to sell from the get-go, as will Martin Lorentzon, his co-founder, who owns 13.2%.So there are a lot of reasons why trading in these shares will be more choppy than usual.Yet there are very good reasons why Spotify has taken this approach.The first, most obviously, is to save money.
The second is that Spotify does not need to raise any new capital - the IPO is merely a way of letting existing shareholders sell some shares.The third is that, as this is a business well-understood by the public, there is no need to put on roadshows marketing Spotify to investors.And a fourth is that there is likely to be significant demand from retail investors, mainly subscribers and fans of Spotify, who will take the view that they will want to own shares in it at any price.Spotify can legitimately argue that, for once, such investors are being allowed to buy its shares on a level playing field alongside the big battalions of institutional investors on Wall Street and in the City.The market professionals, due to their close relationships with the underwriters, invariably get in first.Spotify can also point to some of the more volatile stock market debuts endured by other tech companies.Shares of Snap, the company behind Snapchat, flew to a 44% premium on the day they came to market in March last year. By July, though, they were trading at a discount to their IPO price.Blue Apron, a meal kit maker that came to market in June last year, is another flopperoo. Its shares are down 80% from the IPO price.Both had come to market via the traditional IPO route and could be forgiven, given the subsequent turbulence in their shares, for asking what they paid the investment banks advising on the IPO all that money to do.And, having looked at those examples, Spotify might legitimately ask how much worse it can do.For that reason, even though they will not profit greatly from this IPO, Wall Street's major investment banks have much riding on it.
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The likes of Uber and AirBnB, too, will be watching closely. They are thinking of coming to market and, as tech companies with a high profile similar to that of Spotify, may be tempted to go down the same route if they see the Swedish company get away with it.Ironically, this is one instance where an element on Wall Street will be delighted to see a company coming to market and suffering a big drop in its shares.
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