Markets

Palantir's IPO Shortcut: A Direct Listing

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Data-mining firm

Palantir Technologies Inc.

and smaller tech startup Asana Inc. are set to go public soon using a nontraditional process called a direct listing. The only other notable companies to go public this way are

Spotify Technology SA

and

Slack Technologies Inc.

in 2018 and 2019, respectively. Here’s what you need to know about the process:

Traditional IPOs

In a traditional IPO, a company goes to underwriters, who build lists of institutional buyers, and they backstop the share price.

$120?

$130?

$119!

$122?

$119?

Company

Underwriters do the

preliminary sales and

paperwork and establish

an initial price range

Roadshow begins to help

generate investor interest,

and set IPO price

First day of trading,

shares are listed

Traditional IPOs

In a traditional IPO, a company goes to underwriters, who build lists of institutional buyers, and they backstop the share price.

$120?

$130?

$122?

$119?

Company

Underwriters do the

preliminary sales and

paperwork and establish

an initial price range

Roadshow begins to help

generate investor interest,

and set IPO price

$119!

First day of trading,

shares are listed

Traditional IPOs

In a traditional IPO, a company goes to underwriters, who build lists of institutional buyers, and they backstop the share price.

$120?

$130?

$119!

$122?

$119?

Company

Underwriters do the

preliminary sales and

paperwork and establish

an initial price range

Roadshow begins to help

generate investor interest,

and set IPO price

First day of trading,

shares are listed

Traditional IPOs

In a traditional IPO, a company goes to

underwriters, who build lists of institutional buyers, and they backstop the share price.

Company

Underwriters do the

preliminary sales and

paperwork and establish

an initial price range

Roadshow begins

to help generate

investor interest,

and set IPO price

$120?

$130?

$122?

$119?

First day of trading,

shares are listed

$119!

Direct Listings

In a direct listing, a company simply floats its shares on the stock market

$120?

$130?

$119!

$122?

$119?

First day of trading,

shares are listed

Company

Direct Listings

In a direct listing, a company simply floats its shares on the stock market

$120?

$130?

$122?

$119?

Company

$119!

First day of trading,

shares are listed

Direct Listings

In a direct listing, a company simply floats its shares on the stock market

$120?

$130?

$119!

$122?

$119?

First day of trading,

shares are listed

Company

Direct Listings

In a direct listing, a company simply floats its shares on the stock market

Company

$120?

$130?

$122?

$119?

First day of trading,

shares are listed

$119!

Direct listings are far less common than traditional IPOs, but many companies have been weighing the pros and cons of going that route. Palantir and Asana will be the latest litmus tests for the process.

Pro: Lower Fees

Banker fees on IPOs of similar size, including direct listings (in yellow)

Kinder Morgan

2011

$99 million

JD.com

2014

82

Altice

2017

71

Lyft

2018

70

Pinduoduo

2018

52

Tencent Group

2019

43

Palantir*

2020

38

Spotify

2019

36

Slack

2019

22

*Pending

Source: Dealogic

Direct listings allow companies to save a significant chunk of money that is usually paid to investment banks in a traditional IPO. Palantir’s adviser fees totaled $38.3 million, a fraction of what underwriters would typically charge in big IPOs. Asana’s fees, meanwhile, are $14.5 million.

Con: No New Funding

Total proceeds raised by recent
large tech IPOs

Uber

$8.1 billion

Snowflake

$3.9B

Lyft

$2.6B

Pinterest

$1.6B

Tradeweb

$1.2B

Zoom

$0.9B

Source: Dealogic

Companies typically go public to raise new money. In a direct listing, existing shareholders can sell their shares, but companies don’t raise any cash. That is why only a small number of companies are willing to go through with a direct listing in lieu of a traditional IPO. But for companies that don’t need cash soon, their shareholders aren’t diluted through the IPO process. In late August, regulators approved a proposal from the New York Stock Exchange to let companies raise money through direct listings, though the move recently hit a snag due to objections from a large investor group.

Pro or Con: Potential for First-Day Volatility

U.S. IPOs’ average performance during the first day of trading

2014

13%

2015

14

Spotify

2016

11

13% above

reference price

2017

10

Slack

2018

13

49% above

reference price

2019

13

2020

21

Sources: Dealogic (averages);
Dow Jones Market Data (Spotify, Slack)

In a typical IPO, the company peddles its business plan and its shares to potential investors and sells them stock at an agreed-upon price before the company hits public markets. That doesn’t happen in a direct listing, so it is harder to predict interest for the stock or where the price will go.

Companies going public without a backstopping bank and a new base of big mutual-fund shareholders could face wild price swings or halts during the first day of trading. To be sure, volatility can be good—if the stock vaults higher.

Pro or Con: No Traditional IPO Price

In a direct listing, the market uses several sources, including recent private trades and a so-called reference price published by the exchange, to understand where there might be buying and selling interest.

Palantir’s bankers have told investors the shares could start trading around $10 apiece, according to people familiar with the matter, which equates to a fully diluted market valuation of nearly $22 billion.

Write to Maureen Farrell at maureen.farrell@wsj.com and Ana Rivas at ana.rivas@wsj.com

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