Roblox’s U-turn from IPO to direct listing has rewritten what Wall Street bankers are making on the deal — and who gets credit

  • Video-game platform Roblox is forgoing an initial public offering in favor of a direct listing, requiring new roles from the six underwriters it had tapped for the IPO.  
  • Four of the six underwriters got dropped from any mention in the company’s amended prospectus, and the other two become financial advisors. 
  • The change means a difference in economics for the banks, though a person familiar with the offering said the four banks will still get paid for the work they did on the IPO.
  • Two or three of those that were dropped may be hired as financial advisers, according to a person familiar with the transaction. 
  • Goldman Sachs and Morgan Stanley become the company’s lead financial advisors, charged with helping to line up sellers and buyers for the shares when they start trading as soon as mid-February.  
  • Visit Business Insider’s homepage for more stories.

When Roblox CEO David Baszucki told employees in mid-December that he was postponing the company’s initial public offering slated for later that month, the decision threw tens of millions of dollars in revenue for Wall Street underwriters into doubt.

When the company updated its plans less than a month later, via press release on Jan. 6, it was easy to see why. The company said it was ditching the traditional IPO in favor of a direct listing.

Instead of six underwriters who had been tapped to help with selling and distributing the stock in the IPO, the amended prospectus that Roblox put out two days later said it will use just two financial advisors for its direct listing: Goldman Sachs and Morgan Stanley.

JPMorgan, Allen & Co, Bank of America, and RBC Capital Markets no longer appear in the filing, which means they won’t get league table credit for their work unless the company hires them as financial advisors. A source familiar with the new-look deal said they would likely still get some compensation for the time and resources they had put into prep for an IPO. 

Read more: In an email to employees, Roblox CEO explains why a new round of funding at a $30 billion valuation is better for employees than an immediate IPO

It also means they won’t be in a position to apportion shares to favorite hedge funds or mutual-fund clients at a discount, eliminating a mechanism by which those clients typically deliver some value back to the banks in the form of trading commissions, according to University of Florida finance professor Jay Ritter. The commissions are often much bigger than the IPO fees.

“On average, the fees paid to advisors in direct listings are far below the underwriter gross spreads charged in IPOs,” Ritter said in an email, adding that more banks typically split the bigger fee on the IPO while fewer advisors get a bigger percentage of the smaller fee on the direct listing.

“More importantly,” he said, “a big source of profits for underwriters with traditional IPOs comes from their ability to allocate underpriced shares to their favorite clients, such as hedge funds. These hedge funds are willing to overpay on other trades, in order to get favorable IPO allocations.”

An increasingly heated debate over IPOs 

These allocations are at the center of an increasingly heated debate between proponents of direct listings, like Ritter and Benchmark’s Bill Gurley, and those in favor of keeping the traditional IPO process intact, such as many Wall Street banks and Andreessen Horowitz partners Alex Rampell and Scott Kupor.

Even so, Roblox’s jilted underwriters are still likely to get paid, according to people familiar with the process. In preparation for the traditional IPO, the banks provided advice around the drafting of the prospectus and research capabilities, and the company is likely to reward them for that work, one of the people said. The exact terms of the fees haven’t been worked out.

A second person said two or three of them may still be hired as financial advisors, which would deliver some fees and give them league table credit. Subsequent amendments to the prospectus may list their names. 

Slack, Palantir, and Asana, which went public through direct listings, ended up paying a group of financial advisors with whom they had prior relationships even though they didn’t play a big role on the direct listings. Roblox’s arrangement may look similar, one of the people said.

A Roblox spokesman declined to comment.

The shifting roles for Roblox’s banks may give a preview to the upheaval that may come to Wall Street underwriter rankings and profitability metrics if more companies choose to go public through a direct listing.

The Securities and Exchange Commission changed its rules last month to allow companies to raise money while selling shares through a direct listing, leading some to believe there will be a wave of companies choosing the option over a traditional IPO.

Read more:The SEC just approved a new way for companies to go public and raise cash. Here’s how it works, and why it could transform how hot tech companies think about IPOs.

Inside Roblox’s decision to make the switch 

A direct listing was always under consideration at Roblox, which considered a host of options as it prepared for its public debut, according to one person with knowledge of the process.

The company didn’t need to raise a lot of capital and planned on giving employees a chance to sell shares in the IPO as part of a secondary sale. Executives worried that doing a traditional offering with a small float might limit supply and contribute to a first-day pop that would harm employees by leaving money on the table, one of the people said.

When Roblox executives saw DoorDash and Airbnb IPOs pop after the companies sold less than 11% of their shares, those concerns were realized, the person said. The company soon decided to postpone the offering. 

Last year, companies choosing a traditional IPO left a total of about $34 billion on the table when the stocks popped on the first day of trading, according to Ritter’s research. The calculation makes the assumption that the entire block of IPO shares can sell at the final trade, which has been challenged by critics including Andreessen’s Rampell and Kupor.

To be sure, Roblox will make only the fifth major company to use a direct listing to go public, and the approach may not work for every company.

When Spotify became the first major company to do a direct listing in 2018, some said it could only be done by well-capitalized companies with strong brands. While Asana’s successful listing in September showed that even companies without consumer-facing brands can do them, high-flying tech companies are still the only ones who have tried. 

Roblox quickly focused on raising another round of private capital, inking a deal this month to raise $520 million from investors led by Altimeter Capital and Dragoneer Investment Group.

The transaction gave it needed capital and allowed the pivot to the direct listing. The change means that employees who sell on the opening day will get the market price and won’t be left behind by a stock pop.

Read more: How a Morgan Stanley trading desk headed up by a former NFL quarterback played a central role in Palantir’s and Asana’s public debuts.

Roblox chose Goldman Sachs and Morgan Stanley as its financial advisors.

Goldman, which was the lead left on the IPO, looks set to maintain that leading position on the direct listing. It’s named first in Roblox’s amended prospectus.

The bank is also the first of the listed advisors to the direct market maker, a plumb assignment that requires collecting buy and sell orders and helping to set the price at which the shares will start trading on the direct listing date.

It’s the first time in five direct listings in which Goldman is listed as an advisor to the DMM by name.

The bank that has so far been the only firm to act as lead advisor on previous direct listings, Morgan Stanley, appears to have picked up some incremental influence over the Roblox offering by virtue of that experience. Morgan Stanley is also a named financial advisor to the DMM. 

The assignment means Morgan Stanley gets a slightly higher profile in the listing, according to a third person familiar with the offering. The bank had been listed as the second underwriter in the company’s prospectus back when it was still gearing up for a traditional IPO.

A listing as soon as mid-February means a short time to prep Roblox shareholders and potential investors

This is the first time a direct listing has had two named advisors to the direct market maker.

It remains to be seen who will play a bigger role in setting Roblox’s price – being listed as the first or second advisor doesn’t mean anything, and Goldman and Morgan Stanley will effectively compete to manage the largest amount of volume they can from buyers and sellers in the opening auction.

And just because they aren’t named doesn’t mean other banks can’t play a role. If JPMorgan or Bank of America, for example, hold a close relationship with a selling shareholder looking to unload a large position in the direct listing, that position will give them a role in setting the opening price.

All financial advisors will be able to communicate with the designated market maker, which handles the opening auction. The advisor with the best relationships among the sellers and buyers will attract the most volume and have the the loudest voice in setting the price, which means they will each have to “go out and earn that flow,” one of the people said. 

Spokespeople for Goldman Sachs, Morgan Stanley, JPMorgan, and Bank of America declined to comment.

Roblox’s pivot also means there will be a scramble to get shareholders and potential investors prepared for the direct listing.

In past direct listings, the company and its advisors have had many months to prepare for the direct listing, which they use to prepare an investor day and guidance for investors. The advisors typically use that time to educate selling shareholders, drum up demand from investors and help the company lay the ground for the opening auction. 

The SEC will have to weigh in on the company’s prospectus, which will require another round of back and forth.

If all goes well, the company could start trading publicly as soon as mid-February.

Read more:2 of Goldman Sachs’ top tech bankers explain how Biden could impact the listings frenzy and why the IPO roadshow will never be the same

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