What is a Follow-On Offering (FPO)?
FPOs are stock issuances that follow a company’s initial public offering (IPO). Diluted and undiluted follow-ons exist. In a diluted follow-on offering, new shares issued after the IPO diminish a company’s profits per share (EPS).
Existing shares are added to the market in a non-diluted follow-on offering, maintaining the same EPS.
A corporation must register the FPO and submit a prospectus to authorities to issue more shares.
How an FPO Works
The company’s health and performance and the desired share price determine the price of an initial public offering (IPO). Markets determine follow-on prices. As the stock is openly traded, investors may assess the firm before investing.
Follow-on shares typically cost less than the closing market price. FPO buyers should know that investment banks focusing on the offering prioritize marketing above valuation.
Companies give follow-ups for several reasons. Sometimes, a corporation has to raise funds for debt financing or acquisitions. Investors in other companies may be interested in selling their shares.
Companies may perform follow-on offers to generate funds for debt refinancing at low interest rates. Before investing, investors should consider a company’s follow-on offering factors.
Follow-on Offering Types
A follow-on product might be diluted or not.
Thin Follow-up
A corporation raises funds by issuing more shares and selling them to the public in diluted follow-on offerings. As shares grow, EPS declines.FPO funds are typically used to decrease debt or alter a company’s capital structure. The financial infusion benefits the company’s long-term outlook and shares.
Continued Offering Without Dilute
Non-diluted follow-on offers occur when private shareholders sell previously issued shares to the public. Non-diluted sales provide cash proceeds for shareholders who sell the shares in the open market.
These stockholders are often founders, directors, or pre-IPO investors. Company EPS is constant as no new shares are issued. Non-diluted follow-on offers are known as secondary market offerings.
Sample Follow-on Offering
Alphabet Inc. subsidiary Google (GOOG)’s 2005 follow-on offering was well-publicized. The Mountain View firm issued its IPO in 2004 utilizing the Dutch Auction process. It raised $1.67 billion at $85 a share, below its estimates. However, the 2005 follow-on offering garnered over $4 billion at $295, the company’s share price a year later.
AFC Gamma, a commercial real estate business lending to cannabis entrepreneurs, launched a follow-on offering in early 2022. The corporation plans to sell 3 million ordinary equity shares for $20.50 each. The offering underwriters have 30 days to purchase 450,000 more shares.
Gross sales profits are estimated at $61.5 million by the corporation. Selling extra common shares will cover industry loans and working capital needs.
Is a Follow-up Offering Primary or Secondary?
Primary and secondary follow-ups exist. Newly issued firm shares are sold directly in a direct follow-on offering. Secondary follow-on offerings are public resales of existing stock by investors. Primary offerings dilute, but subsequent offerings do not.
How Do Follow-On Offerings and Initial Public Offerings Differ?
A private firm goes public by issuing its shares on an exchange for the first time in an initial public offering (IPO). After an IPO, a general firm sells extra shares to raise funds in a follow-on offering.
Explain Follow-on Financing.
A startup that has raised finance raises more in a follow-on round. This is private before the startup goes public.
Conclusion
- A follow-on offering (FPO) is a post-IPO share offering.
- Follow-on offers are used to fund debt or make expansion acquisitions.
- Due to the increase in shares in circulation, diluted follow-on offers (FPOs) diminish profits per share (EPS), while non-diluted ones maintain EPS by bringing existing shares to market.
