The end of Wall Street??

https://www.wsj.com/articles/spotify-disrupted-the-music-world-now-its-doing-the-same-to-wall-street-1516024778

Spotify AB upended the world of music with its popular streaming service. Now it is
threatening to do the same to Wall Street.  Banks working on Spotify’s unusual public share listing stand to collect a fraction of the fees
underwriters typically charge in big IPOs, in a blow to the already beleaguered stock-selling
business.  Spotify’s three advisers—Goldman Sachs Group Inc., Morgan Stanley, and Allen & Co.—are
poised to share roughly $30 million in fees, though that could change depending on the size of
the company when it debuts and the success of the deal, according to people familiar with the
matter.  That is a sharp drop from the fees generated by Snap Inc., the last big technology company to go
public in the U.S. When the messaging provider went public last year its valuation was about
the same as Spotify’s currently, but it paid banks a total of nearly $100 million. That was
roughly 2.5% of what Snap raised, a fairly typical fee for a marquee IPO, which is smaller than
the overall average of as much as 7%.  Spotify’s bargain-basement listing comes at the worst possible time for an underwriting
business that has been hit by a steep drop in IPO volume as more tech companies seek private
financing instead. Last year and 2016 were two of the worst years on record for U.S. equity capital-markets
revenue when adjusted for inflation, according to Dealogic. In 2017, ECM in the
U.S. generated just $7.3 billion, roughly 43% of the inflation-adjusted high in 2000.

When the streaming service goes public, banks will collect a fraction of the fees underwriters make in a
big IPO Banks advising Spotify on its share listing will share roughly $30 million in fees, a fraction of the fees underwriters would make
in a typical high-profile IPO.

ECM fees from U.S. companies have traditionally accounted for about one-quarter of overall
U.S. investment banking revenue. In 2016 and 2017, they made up just 13% and 15%, respectively,
Dealogic data show. Spotify’s debut is expected to be the largest for a tech company in 2018. The way in which the
Swedish company’s owners have decided to move into the public domain is anything but
typical. The cash-rich company won’t be using underwriters or raising cash in the so-called
direct listing. Instead, it will simply float its shares at a price the market determines. The listing
is expected to take place in late March or early April, though the timing could change.
There is a big concern among bankers that if this method of going public proves viable, other
highly valuable tech startups Wall Street has been salivating over—like Airbnb Inc. and even
Uber Technologies Inc.—could use it as a model.  “If a company can raise the majority of its growth equity capital privately and float their shares
in a broker-free offering, it would be scary for the underwriting business,” said Michael Sobel,
co-founder of Scenic Advisement, an investment bank serving private tech companies. “The
IPO is a cornerstone of the banking business.”  The Spotify banks won’t perform traditional underwriting functions, which include setting a
price for shares, linking buyers and sellers and agreeing to use cash to stabilize the stock at a
certain level.  While Spotify and its advisers are still determining how exactly the process will
work, the banks are expected to have a role in helping guide the market to a price and
connecting buyers and sellers initially, but not necessarily a central one, people
familiar with the matter said. A suggested price range is expected to be relayed to the market before trading starts. One data
point will be secondary trading in Spotify shares, among the most active on private markets.
They were recently trading at a price valuing the company at roughly $15 billion; it then struck
a share swap with Chinese internet giant Tencent Holdings Ltd. that valued Spotify at nearly
$20 billion.  Unlike a traditional IPO, in which companies typically don’t give guidance and financial models
directly to investors, Spotify plans to provide them both in an effort to help set the pricing.
Bankers will then build a quasi-book of demand at various price points based on conversations
with potential and existing investors.  But they won’t be able to choose which buyers receive which portion of the company’s shares—
a key function in a typical listing. On the upside, the banks won’t be forced to put capital at risk
as they do in a typical IPO.  That will prove little solace to the legion of banks that will miss out on the Spotify listing
altogether. Companies doing large IPOs typically employ more than just three underwriters as
they seek additional help selling shares and the widest possible research coverage. Snap
employed seven key bookrunners; Alibaba Group Holding Ltd. six; and Facebook Inc. nine,
according to Dealogic. Those IPOs also employed more than a dozen additional banks as comanagers.
It is far from guaranteed other private companies will follow Spotify’s lead, even if the listing
goes well. Not every company can do without the cash or generate enough interest from
analysts and investors on its own.

“Most houses have to be sold by real-estate agents and the same is true of stocks,” said George
Parker, professor of finance emeritus at Stanford University’s Graduate School of Business.
“Most companies are not as well known as Spotify and need their story to be told.”
Banks are expected to generate big fees from two companies that will raise more than $1 billion
each through traditional IPOs: home-security company ADT Inc. and Brazilian payment
processor PagSeguro Digital Ltd. Despite their size, both need robust efforts to market their
shares, bankers say.  Moreover, Spotify’s untested move into the public market is highly risky. It isn’t clear whether
large mutual funds, unsure whether they will get a sizable enough allocation, would line up to
buy the stock. If they opt to sit it out, Spotify’s roster of new investors could be filled with hedge
funds looking for a quick flip—and not the kind of long-term investors companies covet.
Write to Maureen Farrell at maureen.farrell@wsj.com