A follow-on offering (FPO) is an issuance of stock shares following a company’s initial public offering (IPO). There are two types of follow-on offerings: diluted and non-diluted. A diluted follow-on offering results in the company issuing new shares after the IPO, which causes the lowering of a company’s earnings per share (EPS).
During a non-diluted follow-on offering, shares coming into the market are already existing and the EPS remains unchanged.
Any time a company plans to offer additional shares, it must register the FPO offering and provide a prospectus to regulators.
Key Takeaways
- A follow-on offering (FPO) is an offering of shares after an initial public offering (IPO).
- Raising capital to finance debt or making growth acquisitions are some of the reasons that companies undertake follow-on offerings (FPOs).
- Diluted follow-on offerings (FPOs) result in lower earnings per share (EPS) because the number of shares in circulation increases, while non-diluted follow-on offerings (FPOs) result in an unchanged EPS because they involve bringing existing shares to the market.
How a Follow-on Offering (FPO) Works
An initial public offering (IPO) bases its price on the health and performance of the company, and the price the company hopes to achieve per share during the initial offering. Since the stock is already publicly traded, investors have a chance to value the company before buying.
The price of follow-on shares is usually at a discount to the current, closing market price. FPO buyers need to understand that investment banks directly working on the offering will tend to focus on marketing efforts rather than purely on valuation.
Companies perform follow-on offerings for various reasons. They might need to raise capital to finance their debt or make acquisitions, or existing shareholders might want to sell some of their holdings.
Types of Follow-on Offerings (FPOs)
A follow-on offering can be either diluted or non-diluted.
Diluted Follow-on Offering
Diluted follow-on offerings occur when a company issues additional shares to raise funds and offer those shares to the public market. As the number of shares increases, the earnings per share (EPS) decreases. The funds raised during an FPO are often used to reduce debt or change a company’s capital structure. The infusion of cash is good for the long-term outlook of the company.
Non-Diluted Follow-on Offering
Non-diluted follow-on offerings happen when holders of existing, privately-held shares bring previously issued shares to the public market for sale. Cash proceeds from non-diluted sales go directly to the shareholders placing the stock into the open market.
In many cases, these shareholders are company founders, members of the board of directors, or pre-IPO investors. Since no new shares are issued, the company’s EPS remains unchanged. Non-diluted follow-on offerings are also called secondary market offerings.
Example of a Follow-on Offering (FPO)
A notable follow-on offering was that of Alphabet Inc. subsidiary Google, which conducted a follow-on offering in 2005. The company’s initial public offering (IPO) was conducted in 2004 and raised approximately $1.67 billion at a price of $85 per share. In contrast, the follow-on offering in 2005 raised more than $4 billion at $295 per share.
In early 2022, AFC Gamma, a commercial real estate company that makes loans to companies in the cannabis industry, announced a follow-on offering. The company planned to offer 3 million shares of its common stock at a price of $20.50 per share. The underwriters had a 30-day period to buy an additional 450,000 shares.
The company estimated gross proceeds from the sale to be approximately $61.5 million. The funds would be used to fund loans to companies in the industry and for working capital needs.
Is a Follow-on Offering a Primary or Secondary Offering?
There are two types of follow-on offerings: primary and secondary. A primary follow-on offering is a direct sale of a company’s shares that are newly issued. A secondary follow-on offering is a public resale of existing shares from current stockholders. A primary offering is dilutive, while a secondary offering is non-dilutive.
What Is the Difference Between a Follow-on Offering and an Initial Public Offering?
An initial public offering (IPO) is when a private company goes public, listing its shares on an exchange for the first time for the public to purchase. A follow-on offering is when an already existing public company sells more shares to the public to raise additional capital.
What Is Follow-on Financing?
Follow-on financing is when a startup that has already raised capital raises additional capital through another round of funding. This occurs in the private space, before the startup has gone public.
Related Terms: Initial Public Offering, Earnings Per Share, Prospectus, Valuation.
References
- CFO. “Google Secondary Offering Raises $4B+”.
- CNET. “Learning from Google’s IPO”.
- TechCrunch. “A Look Back in IPO: Google, the Profit Machine”.
- Globenewswire. “AFC Gamma, Inc., Prices Common Stock Offering”.
