Going Public
On direct listings and the alternatives to the traditional IPO, SPACs included.
Summary
Campbell, a finance journalist, wrote about the mechanics of taking a company public and about the alternatives that emerged to challenge the traditional underwritten offering.
The critique of the conventional process is the book's argument. In a traditional initial public offering, underwriters build a book of institutional demand, set a price, allocate shares to selected investors, and the shares then frequently trade substantially above the offer price on the first day. Campbell argues that this first-day rise, which the industry presents as a successful offering, represents money the company did not receive: shares sold at forty dollars that trade at eighty transferred that difference to the investors who received allocations rather than to the issuer. He documents the allocation process, in which underwriters distribute scarce shares to clients whose future business they want, and argues that the resulting incentives favour underpricing.
The alternatives he covers are the direct listing, in which a company lists its existing shares without issuing new ones or setting a price, letting the market discover it, which Spotify used in 2018 and Slack in 2019; the auction format, which Google used in 2004; and the special purpose acquisition company, which merges a private company into an already-listed shell.
Campbell has substantial access to the participants, including the bankers, the exchange officials and the company executives who pushed for the direct listing structure and negotiated the rule changes required.
The book was published in 2021, at the peak of the special purpose acquisition company wave, which subsequently collapsed with poor returns for investors who bought into the resulting companies. The direct listing has been used by relatively few companies since. The analysis of underpricing and allocation incentives is well established in the academic literature and the book presents it accessibly with current reporting.
Key takeaways 7
- A first-day price rise in a traditional offering represents money the issuing company did not receive.
- Underwriters allocate scarce shares to investors whose future business they want, which creates an incentive to underprice.
- A direct listing sells no new shares and sets no price, letting the market discover it and removing the allocation decision.
- An auction format lets bidders set the price directly, which Google used and few subsequent issuers adopted.
- Special purpose acquisition companies merge a private company into a listed shell, which bypasses the underwriting process entirely.
- Rule changes at the exchanges were required before direct listings could raise capital rather than only list existing shares.
- The special purpose acquisition wave that peaked when this book was published subsequently produced poor returns for investors.
Who should read it
Founders and investors approaching a public listing who need to understand what the traditional process costs and what the alternatives actually do.
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