Here’s an open secret: IPOs, Initial Public Offerings, aren’t actually public. Insider investors buy all stocks the night before. Spotify has tried to change that.
ARI SHAPIRO, HOST:
For many growing companies, there is a rite of passage called going public or IPO. But contrary to what the name might suggest, most IPOs aren’t actually public. Our colleague Darian Woods from Planet Money’s The Indicator explains.
DARIAN WOODS, BYLINE: Dakin Campbell is Business Insider’s chief financial correspondent and the author of the new book, Going Public.
DAKIN CAMPBELL: Investors are decided the night before the stocks trade.
WOODS: The investment banks responsible for the IPO will attract major investors. So the people who run mutual funds, or wealthy individual investors, are the ones who buy all the new stock, often with the intention of selling it back to the general public the next morning at an almost guaranteed profit. Now, a little bang like a slight bump in the stock price on launch day is widely considered a good thing. But the amount that stock prices sometimes rise on the first day of an IPO goes well beyond that. Take LinkedIn. The stock price more than doubled on the first day, and the company lost hundreds of millions of dollars. One person who closely watched the LinkedIn IPO was Barry McCarthy.
CAMPBELL: Barry, you know, the hard-nosed financial markets expert just saw it as so inefficient.
WOODS: A few years later, Barry joined Spotify as Chief Financial Officer. And first, Barry went out and privately raised funds from venture capital firms and private investors.
CAMPBELL: And actually he went out to raise 500 million. And he raises a billion dollars.
WOODS: Still, Barry thought it was worth going public.
CAMPBELL: With that billion dollars in the bank, Spotify can and will begin to consider how it can conduct an eventual IPO on its own terms.
WOODS: Well, Barry, doing this IPO in a new way, wasn’t motivated purely because he was altruistically trying to reform the system.
CAMPBELL: None of them want Spotify to issue new shares unless they have to, as it will only dilute their stake in Spotify and make them less wealthy.
WOODS: So Barry is trying to find a way to keep Spotify as much value as possible.
CAMPBELL: He’s starting to talk to his lawyers and being probed into listing Spotify directly on the stock exchange without having to issue new shares.
WOODS: Direct Listing, that just means you have your existing private stock traded on the stock exchange. But you’re skipping the step of issuing all that new stock to insiders the night before. So Barry gets a direct listing ready. Then it’s the morning of the IPO, April 2018. Spotify has estimated the so-called reference price at $132. The first share is trading at $165.90. That is far above expectations. The people on the trading floor applaud, they shake hands. And at the end of the day, 30 million shares are exchanged and it closes at $149. The direct listing was a success. Several other companies have followed Spotify’s model, companies like Slack and Palantir. But as for that bang, those huge gains on the first day of trading from underselling stock prices? Well, that remains the case for many companies. But at least companies that go public now have a choice. Darian Woods, NPR News.
SHAPIRO: And Spotify advertises on the NPR website and distributes some NPR content.
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