Spotify's Direct-Listing IPO

Craig Dunbar; Stephen R. Foerster; Ken Mark

Product #:9B18N006

Supplier:Ivey

Discipline:Entrepreneurship, Finance, International Business

Setting:Sweden, United States, 2018

Details:Case (PDF) • 19 pages • 2018-04-11 (Rev: 2018-06-22)

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In early April 2018, Spotify Technology SA (Spotify) had planned a rare direct listing on the New York Stock Exchange. Unlike typical initial public offerings (IPOs), which used investment banks as underwriters to help set an IPO price, Spotify’s direct listing would allow market participants to determine the initial price. In a typical IPO, investment banks shopped the potential offer to various clients and, in the process of book building, determined a range for the offer when it started trading. They also often provided support for the issue on the day it started to trade, limiting the downside for shareholders if demand was low. In Spotify’s case, the investment banks were only being paid a nominal fee, and Spotify was not raising capital in the offering. The stock simply started trading on the prescribed day. A portfolio manager with a hedge fund that focused on growing technology companies was considering investing in the firm, but faced a challenge: how could she estimate Spotify’s value when it started to trade?

Learning Objectives

This case has been designed for use in finance courses at both the undergraduate and graduate levels to discuss valuation. It can be used in a variety of places in a course, specifically, to introduce valuation methodologies and the development of financial estimates under various scenarios. Students should be familiar with relative valuation methods such as enterprise value–to–operating profit or earnings before interest, taxes, depreciation, and amortization and discounted cash flow analysis. The discounted cash flow method is briefly described in the case and presented in the teaching note. After completion of this case, students will be able to

understand the music streaming industry and Spotify as a key participant;
conduct an assessment of a firm’s current strategy and future prospects; and
estimate the market value of a firm given estimates and past financial statements.

Spotify's Direct-Listing IPO

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Learning Objectives