(Bloomberg Opinion) -- With each technology company that decides to list its shares in London comes the question, is this the one? Is this the company to make the British capital a legitimate tech hub?
Wise, a money transfer startup known previously as TransferWise, raises the same question. Where it differs from food delivery platform Deliveroo Plc and cybersecurity firm Darktrace Plc, both of which went public in London this year, is the mechanism it’s using: a direct listing. The approach means that the bar is lower to deem the process a success.
Those other two firms pursued the more traditional initial public offering. They raised funds by selling new shares to public market investors. To do so, they hired investment banks who gauged interest in the shares to determine a realistic share price on the first day of trading. But in determining that price, they also set a bar against which the subsequent evolution of the stock can be measured. If it trades lower, as has been the case with Deliveroo, it can be deemed something of a failure. Higher, and it might fairly be called a success, such as with Darktrace.
In a direct listing, the company isn’t seeking to raise any new funds. It’s a means instead for existing investors to sell their shares. And crucially, banks don’t set a price for the opening day of trading. In a rudimentary sense, investors just start selling shares, and see what others are willing to pay for them. That means there’s no benchmark beyond the first trading price. There are risks, of course. Because existing shareholders make no pledge to keep their shares for a lock-up period, trading can be volatile, for instance.
Wise isn’t looking for any additional capital, hence the direct listing. And its executives have been very careful not to target any potential valuation, at least publicly. The firm was reportedly valued at $5 billion in its most recent private round. Unlike both Darktrace and Deliveroo, Wise has been profitable for several years. From an earnings perspective, it looks a lot more promising than either of those two companies.
But its market is also highly competitive. There are scores of money-transfer companies around the world. That means it can’t readily be compared, for example, with Adyen NV, a Dutch firm that specializes in facilitating digital payments for e-commerce, and competes largely with just Stripe Inc. (When you pay for something online, it’s often Adyen that connects the website to your credit card and takes the payment.)
Because of its privileged position in the digital payments market, Adyen enjoys a market capitalization of 57 billion euros ($68 billion), trading at a staggering 110 times its expected earnings. The emerging duopoly with Stripe in e-commerce payments helped Adyen realize Ebitda, an earnings measure, representing 59% of its 684 million euros of sales last year. Although Wise isn’t significantly smaller than Adyen from a revenue perspective, its money-transfer business is considerably less profitable, with adjusted Ebitda hitting 26% of its 421 million pounds in revenue.
Which all means that, no, Wise isn’t the big tech company that the U.K. so desires. But that may not matter much. Rather than having a monolithic tech giant, London is now starting to build a roster of smaller but still moderately successful tech companies, including Deliveroo and Darktrace. And having an ecosystem is more important. It will help build investor nous, and steadily attract other listings.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.
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