Inside Slack’s direct listing: Here’s what actually went down between the tech company and its Wall Street advisers

Beck Diefenbach/Reuters

Slack, which is expected to start publicly trading on Thursday, is the second large tech company to go public in a direct listing, an offering process that throws the traditional IPO on its head.
Slack hired 10 different banks to participate in its direct listing, yet all but three aren’t doing anything besides providing research on the company, sources familiar told Business Insider.
Instead, Goldman Sachs, Morgan Stanley, and Allen & Company will take a reported 90% of the fees, and have done all of the financial advising.
Here’s what they actually did on Slack’s direct listing.
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There are 10 banks listed on Slack’s S-1, the registration paperwork for its direct listing — but don’t go calling them underwriters.

The role of banks is different in a direct listing than in a traditional IPO, with many of the bankers hired by Slack doing virtually no work outside of committing to research coverage of the company, multiple people told Business Insider.

Some of the less active banks agreed to take less than half their normal fees as part of the deal, one person said. Even the banks with the highest-paying roles took home slightly less than in a normal IPO, another person told Business Insider.

Goldman Sachs, Morgan Stanley, and Allen & Company, however, hold the special title of financial adviser on the direct listing, which means they get a bigger check and have had considerably more control over the process.

Those three banks — which also ran the Spotify direct listing — worked with Slack to prepare its S-1 and risk factors, sources said. But unlike a traditional IPO, the banks won’t provide any financing for the company in the process.

For their efforts, the three banks will split around 90% of the $22 million in banker fees, according to Bloomberg.

More work for the banks, but less in fees

In a normal IPO, the underwriters manage the relationship between the company and potential investors. They coordinate the road show, in which investors meet with the executive team and customers at fancy hotels around the country for brunch and a dense slideshow full of financial stats. On this road show, companies answer questions, tell their story, and get the investors familiar with the particularities of how the business is run.

In the case of Slack’s direct listing, all of the official relationship management was left up to the company, some of the people said. Slack’s VP of investor relations, Jesse Hulsing, came from Goldman Sachs, where he was a vice president and equity research analyst, so the company had an insider on its team.

The lack of marketing around a direct listing is one of the reasons bankers say it doesn’t work for most companies looking to enter the public markets. Ahead of Thursday, insiders and outsiders alike voiced concerns that as an office conversation platform, Slack’s product might be too niche for a direct listing to be a success.

But Slack had already raised 10 rounds of funding on the private markets, the last of which involved institutional investors like Dragoneer Investment Group, T. Rowe Price, Wellington Management, and SoftBank. And the company has held intimate meetings with some institutional investors over the past six months, according to the people. Slack live streamed its investor day presentation on May 13.

Slack’s banks handled much of the company’s messaging.

As the lead bank, the Goldman Sachs team led by Nick Giovanni effectively played the role of project manager for the direct listing, according to people familiar with the deal. It handled things like the investor day presentations and video, according to one person familiar with the work.

And the banks involved spent a lot of time on risk mitigation around issues they would usually have more control over in a normal IPO, such as the number of shares available to trade and the pricing, the person said. Goldman sat in on over 100 prep calls ahead of the event, the person said.

Though direct listings don’t "price" like traditional IPOs, the advisers also play a role in determining where the stock starts to trade.

The Morgan Stanley team, led by Colin Stewart, is the named adviser to the direct market marker, Citadel Securities, according to Slack’s filing. With Spotify, Morgan Stanley had the exclusive role, but with Slack the role is shared with the other two financial advisers. Citadel Securities also served as the DMM on Spotify’s direct listing.

Ahead of the first trade, Morgan Stanley trader John Paci and Goldman Sachs trader Benny Adler have direct lines to the DMM, which allows them to give input on the timing, pricing, and volume of the opening trade, people told Business Insider.

In addition to the financial advisers, Citadel Securities’ human traders will pay attention to the New York Stock Exchange’s own reference price, which it set at $26 a share on Wednesday evening.

While bankers don’t build a book of demand for a direct listing the way they might for an IPO, there is a "ghost book" for Slack based off of unofficial conversations between the banks and investors, one person said.

Though most of the trading world is digital these days, Citadel Securities’ human traders will set the opening price for Slack some time Thursday, Business Insider’s Dan DeFrancesco reported.

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Source: Business Insider – bpeterson@businessinsider.com (Becky Peterson)