Overview of Follow-on Public Offers (FPOs)
A follow-on public offer (FPO) is when a company already listed on an exchange issues new shares to investors. The offer involves issuing additional shares after an initial public offering (IPO). Follow-on public offerings are also referred to as secondary offerings.
Key Takeaways
- An FPO is the additional issuance of a company’s shares after its initial public offering.
- Companies typically announce FPOs to raise more equity or reduce debt.
- Main types include dilutive (new shares added) and non-dilutive (existing private shares sold publicly).
- At-the-market (ATM) offerings are a type of FPO for raising capital based on market conditions.
How Follow-on Public Offers (FPOs) Operate
Public companies leverage FPOs through an offer document to issue additional shares. Unlike IPOs, which are the initial equity offering to the public, FPOs are issued post-IPO when the company is already established on an exchange. The proceeds from FPOs generally go to the issuing company. Companies must also comply with regulatory filings with the U.S. Securities and Exchange Commission (SEC).
Types of Follow-on Public Offers (FPOs)
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Dilutive FPOs: This involves increasing the number of shares available, raising money to reduce debt or expand the business. However, it leads to a reduction in earnings per share (EPS) as the number of shares outstanding increases.
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Non-Dilutive FPOs: In this method, existing, privately held shares are brought to public markets. Cash proceeds go directly to shareholders selling the stock rather than to the company, hence the EPS remains unchanged.
Example - Diluted Follow-on Offering
When a company issues more shares to the public to raise funds, it’s referred to as a diluted follow-on offering. Although additional shares may reduce EPS, this capital injection is often beneficial for the company’s long-term outlook.
Example - Non-Diluted Follow-on Offering
This scenario occurs when the existing holders, such as founders or early investors, sell their private shares to the public market. As no new shares are issued, the non-dilutive approach keeps EPS constant. This is often termed a secondary market offering.
At-the-Market (ATM) Offering
An ATM offering allows a company to raise capital based on current market conditions. If share prices are not favorable, the company can postpone issuing shares. This flexibility allows companies to optimize their financing strategies while minimizing market disruptions.
FPOs in the Investment Market
FPOs are frequently used in the investment world to raise equity efficiently. However, they can sometimes lead to a temporary dip in share prices due to dilution concerns among shareholders. Recent examples include Longboard Pharmaceuticals and Cyngn, both leveraging FPOs to raise significant funds in 2024.
Benefits of Follow-on Public Offers (FPOs)
Companies may use FPOs to pay off debt, improve their debt-to-value ratio, or fund growth initiatives. This additional capital can support new projects or enhance overall financial stability.
Advantages of At-the-Market (ATM) Offerings
ATM offerings enable quick capital raising with minimal market impact. These are stealthy and cost-effective compared to traditional offerings and require less managerial involvement.
Disadvantages of ATM Offerings
While ATM offerings offer flexibility, their smaller capital raise might not be sufficient for larger financial needs. Market-dependent pricing can also lead to fluctuating outcomes.
Conclusion
A follow-on public offer (FPO) helps publicly traded companies to issue and sell new shares, raising capital without incurring debt. There are two primary types of FPOs: dilutive and non-dilutive. This strategy enables companies to effectively tap into the capital markets, financing growth projects, reducing debt, or increasing working capital. Investors can also take part in FPOs by purchasing additional shares or realizing returns from selling existing ones.
By understanding the mechanics and types of FPOs, investors and companies alike can make informed decisions that benefit their financial strategies and operational goals.
Related Terms: Initial Public Offering (IPO), At-the-Market (ATM) offering, dilutive FPO, non-dilutive FPO.
References
- Nasdaq. “Secondary Public Offerings (SPOs)”.
