Slack ‘Direct’ IPO Pegs Shares At $26 Ahead Of Float For $16 Billion Valuation

Slack’s alternative ‘direct’ IPO float is expected to go ahead today with the messaging app company pegging its shares at $26. That means the company will have an initial market capitalisation of $16 on the NYSE stock exchange. Slack becomes only the second major company ever to opt for a ‘direct’ listing, which shuns the usual practise of pre-selling shares at a fixed price ahead of their free float. Instead, Slack’s shares will be simply released directly onto the NYSE.

Normally an IPO involves drumming up investor interest through a roadshow and media campaign. An initial price range for the shares is set at the start of that process. The eventual IPO share price will either be somewhere within that range, or it might be slightly lowered or raised as a response to the level of investor interest at that range. Once the final price has been set an underwriter(s) agree to buy up any unsold shares at that price but if it has been judged well there should be enough buyers to mean that isn’t necessary.

A direct listing misses out the pre-sale stage of the process and the company simply lists a portion of all of its shares directly on the exchange for sale. Because no guarantees have to be made to investors around a pre-sale there is no ‘lock-up’ in a direct listing and founds, staff and earlier private investors are all free to sell any shares they hold immediately. That theoretically risks the market being flooded with sellers, driving down the price. However, Slack are clearly confident current shareholders will not rush to cash in at the earliest opportunity.

The initial $26 pricing is not fixed as an ‘offer price but acts as a ‘guidance’ starting point. Slack’s share price may not even open trading at $26. The debut price will be determined by the buy and sell orders placed with broker-dealers today before the market opens in New York.

Slack started as a side project of co-founder Cal Henderson, a Brit from Cambridge. While working as a developer on a video game that was never actually released in Toronto, Canada, Henderson and some colleagues created what later became Slack as a more convenient alternative to email, messaging and collaborating on designs, animation and code. After its potential was spotted and further developed into something more like today’s Slack, the app quickly became popular for communication between teams and professionals.

Slack is not simply a messaging app like Facebook messenger or Skype. It offers cloud-based collaboration tools and services that help teams get projects done. The company makes money through a ‘freemium’ model. For small teams the free version of the app might be enough but the company has had a good record of converting those who start off using the free version into paying customers. Plans range from around $6 to $15 a month with slight currency variations between international markets.

Revenues were $100 million over the 2017 tax year, $220 million in 2018 and $401 million in 2019. Growth this year has been 82%. Two thirds of revenues are currently generated in Slack’s home market of the U.S. and the rest internationally. As with many SaaS (software as a service) business models, gross margins are very strong at 87%.