Big Tech and Recent IPOs

A Cheat-sheet for Understanding Follow-on Public Offers

Aakriti

29th Sep'22

All business requires funds to execute their ideas successfully and achieve their financial goals. Capital is required to research and develop new products, manufacturing, marketing, and distribution. Funds also play an important role in growth and expansion, both of which are essential to increase the profitability of a business/company.

 

Therefore, as a company grows and aims for better profitability, it needs to raise capital. Most commonly, companies/businesses avoid taking loans from financial institutions because higher debt reflects negatively on a company's balance sheet.

 

When companies want to avoid borrowing to raise funds, they seek an Initial Public Offering. IPO means - the company gets listed on the stock exchange and allows its shares to be traded on the exchange. When a company offers its equity to the public for the first time, it is called "Initial Public Offering (IPO)."

 

But what happens when the company wants to raise more capital after a few years of an IPO? 

They can utilize a capital raising process called Follow-on Public Offer (FPO). 

 

a picture of coin

 

But what is FPO exactly?


 

Follow-on Public Offer (FPO)

 

Definition: A follow-on public offering (FPO) is a process by which a company listed on a stock exchange issues its shares to investors. It is the issuance of additional shares made by a company after an initial public offering (IPO). Follow-on offerings are also known as secondary offerings.

 

It is important to note that an FPO is a type of secondary offering at any time after the primary offer (IPO). While an FPO is a secondary offering, each secondary offering is not an FPO.

Now that you know what FPO is, you must be wondering how does it work? 

Well, let's have a look at -


 

How does an FPO work?


 

Going public allows a company to raise significant capital by offering public shares for investors to purchase. Sometimes, a company might need to raise additional capital for various reasons. In this situation, to avoid borrowing, a company will issue an FPO.

 

Requirements to issue an FPO:

 

  • It must already be a publicly traded company, meaning it must already be listed on a stock exchange.

  • The company must offer its newly issued shares to the general public, not just to existing shareholders.

 

Raising funds through FPO is lengthy and often involves creating a prospectus, waiting to receive interest, then allotting shares to investors. 

 

A picture of statistic

 

Types of FPO

 

Non-Diluted Follow-on Offering

 

Non-diluted follow-on offering is when the shareholders of existing, privately-held shares bring the shares insured earlier to the public market for sale. All the cash proceeds from non-diluted sales go directly to the shareholders placing the stock into the open market.

 

These shareholders may be company founders, members of the board of directors, or pre-IPO investors. Since no new shares are issued, the company's EPS remains unchanged.

 

At-the-Market Offering (ATM)

An at-the-market (ATM) offering gives the company selling its shares the ability to raise capital as required. If the company is unsatisfied with the status quo price of shares, it can refrain from offering shares. Hence, ATM offerings are also referred to as controlled equity distributions because of their ability to sell shares into the secondary trading market at the current prevailing price.

 

What does it mean for individual investors?

If you are an investor in a company that has announced a follow-on offering- it is time to pay attention. FPOs dilute existing shares. What this means for you is your shares will represent a smaller percentage of ownership in the company. It may result in lower dividends if and when the company passes its profits to shareholders.

 

Alternatively, if there is a company you've been considering investing in has issued an FPO, it could be a beneficial opportunity for you. As FPO shares are often offered at a discounted rate to entice buyers. Simply put, the FPO is an opportunity for you to buy shares on sale.

 

Alternatives to FPO

 

An FPO is one of how a public company raises capital, but it is not the only one. Companies can raise additional capital through borrowing as well. This can include-

 

  •  Borrowing from a bank 

  •  By issuing bonds

  • Borrowing has some contrasting pros and cons compared to issuing new shares. 

 

Pro

The company does not end up diluting its existing shares, which benefits existing shareholders. 

 

Con

The company has to pay interest on borrowed money, which is critical as it ultimately makes the capital more expensive.



Difference between FPO and IPO

 

 

a picture of statistics

 

 

 

Follow-On Public Offer (FPO)

Initial Public Offer (IPO)

The company is already public, meaning it is already listed on a stock exchange.

The company is going public for the first time.

A process companies use for raising capital.

A process companies use to raise capital.

Shares are often sold at a discount.

Shares are sold at a price determined through market research.

Diluted vs. Non-diluted shares

Common vs. Preferred shares

Less risk is involved since the company has already proven itself in the market.

More risk is involved since the company has yet to prove itself in the market

 

  • An initial public offering (IPO) is when a company issues shares to the public for the first time. Before an IPO, companies are generally funded only by the owners, investors, or a group of investors. A company goes public, usually as a way of raising capital to expand its businesses.

 

  • Although there are some similarities between an IPO and an FPO, i.e., in both cases, the company is offering new shares for the public to purchase, there are some notable differences as well. 

 

The most obvious difference is that while an IPO is when a company goes public for the first time, a company that issues an FPO is already public.

 

  • Another difference is how the shares are priced during the IPO versus the FPO. In the case of the IPO, companies do extensive market research and analyze an IPO to get the right price. On the other hand, in the case of an FPO, the new shares are usually offered at a discounted price compared to the current share price to attract buyers.

 

  • A significant difference between FPOs and IPOs is the risk factor associated with investing in each. As per the SEC, buying shares during or immediately after an IPO can be risky for investors and so you need to check before you invest in an IPO But in the case of an FPO, since the company has been public for some time, so the investors can easily see its track record.

 

Key takeaways

 

  • A follow-up public offer (FPO) is when a company that’s already publicly issued additional shares of stock.

  • Through FPO, companies raise additional capital without borrowing.

  • In an FPO, a company is likely to issue new shares, diluting the ownership and profits of all existing shares.

  • FPO shares are often issued at a discount to attract buyers. This means that investors can get them for less than the market rate.


 

I hope this blog proved to be a worthwhile read for you and you now know what FPO is.


 

We at OpenGrowth, are committed to keeping you updated with the best content on the latest trendy topics from any major field. Also, both your feedback and suggestions are valuable to us. So, do share them in the comment section below.

 

A student in more ways than one. Trying to feed her curiosity with news, philosophy, and social commentary. 

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