Seize a Competitive Advantage – Or Don't Compete!

FPO Folow-on Public Offer: Meaning – Explanation – Example

FPO – What Is a Follow-on Public Offer?

FPOFPO, or Follow-on Public Offer, is how a firm already listed on the stock exchange issues new shares to current shareholders or new investors.  It is a procedure where a firm that is publicly traded issues fresh shares to existing shareholders or to the open market. A firm can use an FPO to diversify its equity base or to pay off debt. Follow-on offerings are also known as secondary offerings.

FPO vs IPO

An IPO is an initial public offering.  It occurs when an unlisted firm issues shares to the public for the first time. An IPO is a method most companies use to become listed on a publicly-traded stock exchange. Hence, it is known as an IPO or initial public offering. FPO, on the other hand, is a process that occurs following an IPO.  It is when the publicly listed corporation offers additional shares to the public.

  • IPO – An IPO occurs when a private company lists its stock for the first time to be publicly traded.  The company is unlisted prior to its first or initial public offering. Potential investors may not have much of a track record to judge the company.  As a result, it is a somewhat high-risk investment.
  • FPO – In contrast, an FPO is offered when the company is already listed. This allows investors to examine market patterns and study the company’s performance.  A follow-on offering is simply the release of additional shares into the marketplace.  It is considered less risky that an IPO because the company has a performance track record.

FPO – A Closer Look at Follow-on Public Offers

A public company can benefit from an FPO via an offer document. FPOs should not be confused with IPOs, the initial public offering of equity. FPOs are secondary issues issued after a firm is listed on an exchange. The share price when offering the IPO is determined by the firm’s performance.  Of course, the company expects to attain the desired price per share during the IPO listing. However, once listed and traded on a stock exchange, the share price is market-driven. As a result, before purchasing an FPO, the investor will have a better understanding of the company’s valuation. Furthermore, to entice investors, the price of follow-on public shares is often lower than the current trading price.

The corporation might present an FPO for a variety of reasons.  For example, the need for capital to finance debt or execute an acquisition. In some cases, businesses wish to raise funds to refinance their debt at a period of cheap interest rates.  Investors should always exercise caution and carefully consider the motivation for the company’s offering.

Types of FPO – Follow-on Public Offers

There are two predominant categories of follow-up public offers. The first is dilutive to investors.  This is when the company’s Board of Directors expands the share float or the number of accessible shares. This type of follow-on public offering aims to raise funds to pay down debt.  Or, to develop the business by expanding the number of outstanding shares. A non-dilutive follow-on public offer is the other type. This method is useful when directors or significant shareholders dispose of their privately-owned shares.

Diluted Follow-on Offering

Diluted follow-on offers are the result when a corporation issues extra shares.  Selling those shares on the open market adds to the total number of shares already in circulation. Earnings per share (EPS) drop as the number of shares grows. The monies raised through an FPO are typically used to decrease debt or reconfigure a company’s capital structure. The inflow of cash is beneficial to the company’s long-term outlook, and consequently beneficial to its stock.

Non-Diluted Follow-on Offering

Non-diluted follow-on offerings result when holders of previously issued shares bring them to the public market for sale. The profits from non-diluted sales are distributed directly to the shareholders who sold the stock on the open market. In many situations, these shareholders are firm founders, board members, or pre-IPO investors with large blocks of shares. Because no new shares are issued, the company’s earnings per share remain the same. Secondary market offerings are another term for non-diluted follow-on offerings.

At-the-Market FPO 

An at-the-market (ATM) follow-on public offering is a sale of securities into an existing trading market.  The trading price is related to the shares’ then-market price. ATM offerings are ongoing offerings that let issuers raise modest quantities of cash with little market impact.  ATM offerings tend to be low cost with no management engagement. An ATM offering allows a firm to obtain funds as needed. If the corporation is dissatisfied with the prevailing share price on a given day, it may choose not to offer shares. This type of follow-on offering lets companies sell shares into the secondary trading market at the current prevailing price.  ATM offerings are frequently referred to as managed equity distributions.

Newly issued ATM shares are sold into the trading market through an authorized sales agent at market pricing. These offerings are made in accordance with an equity distribution or sales agreement.  The details are contractually established between the issuer and one or more sales agents. The sales representative may work as an agent offering to give a best effort for price and volume.  Or, as a principal with a firm commitment.  Nevertheless, most transactions are conducted through an agency.

Why Do Companies Make a Follow-On Public Offer?

Companies typically issue extra shares in order to inject more capital into the firm. The following are some of the reasons why a corporation might need to raise capital:

  • Retire existing debt – If the company’s debts are too large, the sale revenues may be used to pay off existing debt. This allows them to escape debt covenants that would otherwise limit their commercial operations.
  • Increase capital structure – A corporation may issue additional shares in order to increase the number of existing equity shares and rebalance its capital structure while maintaining the ideal debt to equity ratio.
  • IPO shortfall – When an IPO fails to raise the necessary funds for a company’s expansion ambitions, it will issue additional shares in a follow-on public offering.
  • Equity financing – Rather than accumulating debt, a firm may decide to obtain cash by issuing shares.  This can be useful in financing new initiatives, acquisitions, or commercial operations.

FPO – Example of a Follow-on Public Offer

In the investment world, follow-on offerings are widespread. They make it simple for businesses to raise additional equity that can be used for a variety of purposes. Share prices of companies that announce secondary offers may fall as a result. Secondary offers can elicit unfavorable reactions from shareholders since they dilute existing shares.  Many are presented at below-market prices to entice new shareholders.

Tesla – Follow-on public offers

Following its original public offering, Tesla issued additional shares many times. In 2011, they issued 5,300,000 new common shares, and in 2012, they issued 4,344,930 new common shares. They announced an offering of $2 billion in stock at the beginning of 2020. They announced another $5 billion stock offering in December 2020.

Tesla Motors, Inc. (Nasdaq:TSLA), a manufacturer of high-performance fully electric vehicles and advanced electric vehicle powertrain components, today announced a follow-on offering of 5,300,000 shares of its common stock. All 5,300,000 shares are being offered by the company. In addition, the company has granted the underwriter a 30-day option to purchase up to an additional 795,000 shares of common stock. (Source: tesla.com)

Up Next: Amazon Stock Split – What Does it Mean to Investors?

Amazon Stock Split June 6th, 2022 marked the first trading day after Amazon’s announcement of a 20-for-1 stock split back in March of 2022. After trading above $2000 per share prior to the stock split, Amazon shares were revalued at $120 per share. In Monday trading, shares closed 2% higher at $124.80.  This is after reaching an intraday high of $128.70 earlier in the session. The stock split is purely cosmetic and adds no value to shareholders.  Nevertheless, shares rose over 8% in the five days leading up to the split.

Stock splits reduce a company’s share price while increasing the number of shares outstanding. As a result, stock splits are typically stated to be irrelevant because these changes cancel each other out. While this is true in principle, a firm will not arbitrarily split its shares. Not unless it is convinced that the business will continue to perform well.  Studies have shown that the typical company that splits its stock outperforms, at least in the short run.

Leave a comment

Your email address will not be published.