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Slack makes its public debut by going off-script with direct offering

The stock began trading on the NYSE at $38.50, well above its reference price of $26

Slack CEO Stewart Butterfield speaks last April at a company conference in San Francisco. The maker of workplace collaboration software is going public. (Noah Berger/AFP/Getty Images)

Slack joined the ranks of tech unicorns embarking on public life, beating expectations with its trading debut — without the trappings or fanfare of a traditional IPO.

The workplace messaging platform eschewed the Wall Street roadshow in favor of a direct offering, which allows company investors and other stakeholders to sell directly to the market without issuing new shares. The San Francisco-based company’s stock began trading Thursday as WORK on the New York Stock Exchange at $38.50, well above its reference price of $26. By midafternoon, it was closing in on $41.

“The big thing for us was in the traditional IPO, it’s the company that’s offering shares, you might raise, you know, a billion dollars or something like that,” Slack chief executive Stewart Butterfield said Thursday during an interview on CNBC. “When you raise a billion dollars, you dilute existing shareholders, by issuing new shares. So, we are not doing that. We’re just opening it up for trading.”

Spotify is the only other major company to go the direct listing route recently; it debuted in April 2018 with a reference price of $132, and its stock has climbed about 15 percent since.

It’s a somewhat risky move, because a direct offering means there are no underwriters helping to drum up interest and capital, or to hold shares that aren’t sold through the initial public offering to ensure a strong debut. But it also streamlines what is generally a time-consuming and costly process, and analysts have said that Slack’s popularity could allow it to generate plenty of interest on the strength of its brand alone. Experts think other big names, like Airbnb, could follow the same strategy.

“While Spotify proved that a direct listing is a viable alternative to an underwritten IPO, the process is certainly not right for every issuer,” Latham & Watkins, the law firm that guided both Spotify and Slack through their direct offerings, wrote in a case study. “The success of Spotify’s direct listing was due, in part, to Spotify being a well-capitalized company with no immediate need to raise additional capital, while also having a large and diverse shareholder base that could provide sufficient supply-side liquidity on the first day of trading, as well as a well-recognized brand name and an easily understood business model.”

Goldman Sachs, Allen & Co. and Morgan Stanley, which worked with Spotify on its direct listing last year, are also assisting Slack.

Analysts had expected Slack to trade well above its reference price, which was set by the NYSE and based on the company’s recent private market trading and consultations with Slack’s financial advisers. Slack has raised more than $1.3 billion in funding from investors, and a regulatory filing pegged its value near $12 billion.

As a darling of Silicon Valley, Slack enjoys rare name recognition for a relatively young company. But that also places it in a highly competitive environment, along with juggernauts like Google, Facebook and Microsoft, which tried to buy Slack outright for $8 billion in 2016.

“Growing competition from big tech is a direct headline negative for Slack,” Rohit Kulkarni, an analyst with MKM Partners, wrote in a note to investors this week. “However we believe the market opportunity for Slack’s products is quite large and growing quickly. Put another way, we believe competitive intensity may not manifest in Slack’s top-line growth rate. However, it might show up in pushing the profitability can further down the road.”

Slack has reported “significant net losses” each year since its founding in 2009 and warned it “may not achieve or maintain profitability in the future,” regulatory filings show. Its explosive growth has also cooled, with the company projecting a 49 percent increase in revenue this fiscal year, versus the 82 percent surge reported last year. But the strength of its debut so far suggests investors are willing to bet on Slack, said Alejandro Ortiz, a SharesPost analyst.

“It’s clear that, for now, public investors see value in the future potential growth of the company, despite its losses to date,” Ortiz said. “It’s too early to see if this direct listing was a success, but the company’s life as a public company is off to a strong start.”

Slack’s offering follows a slew of unicorn initial public offerings, some of which ended with more whimper than bang. On its first day of trading, ride-share giant Lyft saw its shares surge, then sink. It now trades well below its IPO price. Uber closed well below its IPO price on opening day and has only recently clawed its way back. But other software companies have fared better: Shares of the cybersecurity company CrowdStrike and cloud conferencing company Zoom Video Communications have more than doubled since their IPOs.

“The absence of a potentially notable pop, as seen with traditional IPOs, may also hamper Slack’s retail demand,” Ortiz wrote recently.

More than 600,000 organizations around the world use Slack, which was founded by the creators of Flickr. Its 10 million users collectively spend 50 million hours on it in a typical week.