ARI SHAPIRO, HOST:
For many growing companies, there is a rite of passage, the initial public offering, or IPO. But contrary to what the name implies, most IPOs are not actually public. Our colleague Darian Woods from The Indicator from Planet Money explains.
DARIAN WOODS, BYLINE: Dakin Campbell is the chief financial correspondent for Business Insider and he's the author of the new book "Going Public."
DAKIN CAMPBELL: Investors are decided the night before the shares start trading.
WOODS: The investment banks in charge of the IPO will gather together big investors. So the people who run mutual funds or wealthy private investors, those people are the ones who will buy all the new shares, often with the intention of selling them again the next morning to the public at large at an almost guaranteed profit. Now, a little bit of a pop, like a slight rise in the share price on the day of the launch is widely seen as a good thing. But the amount that share prices sometimes rise on the first day of an IPO goes way beyond that. Take LinkedIn. Its share price more than doubled on the first day, hundreds of millions of dollars the company missed out on. One person closely watching LinkedIn's IPO was Barry McCarthy.
CAMPBELL: Barry being sort of, you know, the no-nonsense financial markets expert just saw that as so inefficient.
WOODS: A few years later, Barry joined Spotify as its chief financial officer. And at first, Barry went out and raised funds privately from venture capital firms and private investors.
CAMPBELL: And he had actually gone out to raise 500 million. And he raises a billion dollars.
WOODS: Still, Barry thought it was worthwhile to do an IPO.
CAMPBELL: So with that billion dollars in the bank, Spotify can and does start thinking about, like, how it can do a potential IPO on its own terms.
WOODS: Now, Barry doing this IPO in a new way wasn't purely motivated by altruistically wanting to reform the system.
CAMPBELL: None of them want Spotify to issue new shares if it doesn't need to because that's just going to dilute their stake in Spotify and make them less wealthy.
WOODS: So Barry tries to figure out a way to retain as much value as possible to Spotify.
CAMPBELL: He starts talking to his lawyers and starts sounding people out about whether he could list Spotify right on the exchange without having to issue new shares.
WOODS: Direct listing, that means just allowing your existing private shares to be traded on the stock market. But you skip over that step of issuing all those new shares 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 what it's called a reference price at $132. The first share is traded for $165.90. This is way above expectations. People on the trading floor applaud, they shake hands. And by 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 pop, those huge gains on the first day of trading from share prices that are sold too low? Well, that remains the case for a lot of companies. But at least companies going public now have a choice. Darian Woods, NPR News.
SHAPIRO: And Spotify advertises on NPR's website and distributes some NPR content. Transcript provided by NPR, Copyright NPR.
