Key Takeaways
- Additional shares issued after IPO to raise capital.
- Dilutive or non-dilutive types affect ownership differently.
- Shares sold at market price, often with discount.
- FPOs provide faster, less risky capital access.
What is Follow-On Offering?
A follow-on offering (FPO), also known as a follow-on public offering, is when a publicly listed company issues additional shares after its initial public offering (IPO) to raise more capital. Unlike the IPO, shares in an FPO are priced based on current market conditions rather than a fixed price.
This process enables companies to access the public markets again to fund growth, pay down debt, or allow existing shareholders to liquidate part of their holdings.
Key Characteristics
Follow-on offerings have distinct features that differentiate them from IPOs and other equity raises:
- Issued by Listed Companies: FPOs are only available to companies already trading on a stock exchange.
- Market-Based Pricing: Shares are offered near current market prices or at a discount to attract investors.
- Dilutive vs. Non-Dilutive: Dilutive FPOs create new shares, raising fresh capital but diluting ownership; non-dilutive offerings sell existing shares without increasing share count.
- Lower Investor Risk: Due to established earnings history and public disclosures, investors can better assess company fundamentals.
- Purpose-Driven: Capital raised can support expansion, debt repayment, acquisitions, or improve stock liquidity.
How It Works
Companies initiate an FPO by filing with regulatory authorities and setting an offering size and price based on the current fair market value. Investors purchase shares either directly or through underwriting syndicates.
In a dilutive FPO, the increased shares outstanding may impact your ownership percentage and potentially affect stock price due to dilution. Non-dilutive offerings involve selling existing shares held by insiders or private equity, which does not dilute ownership but might influence market perception.
Examples and Use Cases
Follow-on offerings serve various industries and investor needs. Here are some notable examples:
- Airlines: Delta and American Airlines have used FPOs to raise capital for fleet expansion and operational costs.
- Technology Sector: Many tech companies post-IPO conduct secondary offerings where early investors sell shares, a form of non-dilutive FPO.
- Growth Companies: Firms seeking rapid expansion may opt for dilutive follow-on offerings to fund new projects or acquisitions, a strategy highlighted in our best growth stocks guide.
Important Considerations
When evaluating a follow-on offering, consider the impact on your ownership and the company's capital structure. Dilutive offerings can decrease your percentage stake but potentially strengthen the company’s financial position.
Also, watch for insider selling in non-dilutive offerings, which might signal changes in management confidence. Understanding idiosyncratic risk related to the issuing company can help you assess potential investment implications before participating.
Final Words
Follow-on offerings provide companies with a flexible way to raise capital or enable shareholders to exit, but they can affect share value through dilution or market perception. Review the type of FPO carefully and analyze how it aligns with your investment goals before making decisions.
Frequently Asked Questions
A Follow-On Offering (FPO) is when a publicly listed company issues additional shares to the public after its initial public offering (IPO) to raise more capital. It allows companies to access funds while already being traded on the stock exchange.
Unlike an IPO where shares are issued for the first time at a fixed price, an FPO happens after a company is listed, with shares priced based on market value. FPOs usually carry lower investor risk due to the company’s established track record and public disclosures.
The two primary types are dilutive FPOs, where new shares are created and ownership is diluted, and non-dilutive FPOs, where existing shareholders sell their shares without increasing the total share count.
Companies use FPOs to raise capital for expansion, pay off debt, finance acquisitions, improve stock liquidity, or allow existing shareholders to sell their stakes. It provides quick access to public funds without taking loans.
In dilutive FPOs, existing shareholders may experience ownership dilution as more shares enter the market. In non-dilutive offerings, shareholders’ ownership isn’t diluted, but heavy insider selling might raise concerns about the company’s future.
Investors can buy shares at a discount to the current market price during an FPO, potentially gaining quick profits. Additionally, FPOs offer less uncertainty compared to IPOs due to more available company information and analyst coverage.
Yes, FPOs can put downward pressure on stock prices because of increased share supply. If perceived as a sign of urgent capital needs or heavy insider selling, it may reduce investor confidence.
A rights issue is offered only to existing shareholders at a discount, allowing them to maintain ownership percentage. In contrast, an FPO is open to the general public and often involves a smaller, more cost-effective capital raise.
