Table of Contents
- What Is a Follow-on Offering (FPO)?
- Key Takeaways
- How a Follow-on Offering (FPO) Works
- Types of Follow-on Offerings (FPOs)
- Diluted Follow-on Offering
- Non-Diluted Follow-on Offering
- Example of a Follow-on Offering (FPO)
- Is a Follow-on Offering a Primary or Secondary Offering?
- What Is the Difference Between a Follow-on Offering and an Initial Public Offering?
- What Is Follow-on Financing?
What Is a Follow-on Offering (FPO)?
Let me explain what a follow-on offering, or FPO, really is—it's when a company issues more stock shares after its initial public offering, or IPO. You should know there are two main types: diluted and non-diluted. In a diluted FPO, the company creates new shares post-IPO, which directly lowers the earnings per share, or EPS, because you're spreading the earnings over more shares.
On the other hand, a non-diluted FPO involves existing shares entering the market, so the EPS stays the same—no new shares are added. Remember, whenever a company decides to offer these additional shares, it has to register the FPO and provide a prospectus to regulators; that's non-negotiable.
Key Takeaways
To sum it up quickly, an FPO is simply an offering of shares that comes after the IPO. Companies do this to raise capital for things like paying off debt or funding growth through acquisitions. If it's diluted, expect the EPS to drop because more shares are in circulation; if non-diluted, EPS remains steady since it's just existing shares hitting the market.
How a Follow-on Offering (FPO) Works
You need to understand that an IPO's price is based on the company's health, performance, and what they aim to get per share initially. But with an FPO, the pricing is driven by the market itself—since the stock is already trading publicly, investors can assess the company's value before jumping in.
Typically, FPO shares are priced at a discount to the current closing market price. Be aware that the investment banks handling the offering often prioritize marketing over strict valuation. Companies pursue FPOs for various reasons—sometimes it's to raise money for debt or acquisitions, other times it's so investors can cash out their holdings.
You might also see companies using FPOs to refinance debt when interest rates are low. As an investor, always check the company's motives for the FPO before you commit your money.
Types of Follow-on Offerings (FPOs)
As I mentioned, FPOs come in diluted or non-diluted forms—let's break them down.
Diluted Follow-on Offering
In a diluted FPO, the company issues new shares to raise funds and sells them to the public. This increases the total number of shares, which decreases the EPS. The money from this often goes toward reducing debt or adjusting the capital structure. Overall, this cash influx supports the company's long-term prospects, which can benefit the shares in the end.
Non-Diluted Follow-on Offering
For a non-diluted FPO, holders of existing private shares bring them to the public market for sale. The cash goes straight to those shareholders, not the company. These are often founders, board members, or early investors. No new shares mean EPS doesn't change, and these are also known as secondary market offerings.
Example of a Follow-on Offering (FPO)
Take Google's FPO in 2005 as a notable case—Alphabet's subsidiary raised over $4 billion at $295 per share, following their 2004 IPO that used a Dutch Auction and brought in about $1.67 billion at $85 per share, which was on the low end of expectations.
More recently, in early 2022, AFC Gamma—a commercial real estate firm lending to cannabis companies—announced an FPO of 3 million shares at $20.50 each, with underwriters having 30 days to buy an extra 450,000. They expected around $61.5 million in proceeds to fund loans and working capital.
Is a Follow-on Offering a Primary or Secondary Offering?
FPOs can be primary or secondary. A primary one is when the company sells newly issued shares directly, making it dilutive. A secondary FPO is the resale of existing shares by current stockholders, which is non-dilutive.
What Is the Difference Between a Follow-on Offering and an Initial Public Offering?
An IPO is when a private company first lists its shares on an exchange for public purchase. An FPO happens later, when that public company sells more shares to raise additional capital.
What Is Follow-on Financing?
Follow-on financing is when a startup, still private and pre-IPO, raises more capital after an initial round—it's not the same as a public FPO.
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