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Follow-on Offering (FPO)

Follow-on Offering (FPO)

What Is a Follow-on Offering (FPO)?

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 brings about the company giving new shares after the IPO, which causes the lowering of a company's earnings for every share (EPS).

During a non-diluted follow-on offering, shares coming into the market are as of now existing and the EPS stays unchanged.

Any time a company plans to offer additional shares, it must register the FPO offering and give a prospectus to regulators.

How a Follow-on Offering (FPO) Works

An initial public offering (IPO) puts together its price with respect to the wellbeing and performance of the company, and the price the company desires to accomplish per share during the initial offering. The pricing of a follow-on offering is market-driven. Since the stock is as of now publicly-traded, investors get an opportunity to value the company before buying.

The price of follow-on shares is generally at a discount to the current, closing market price. Likewise, FPO buyers need to comprehend that investment banks directly working on the offering will generally zero in on marketing efforts as opposed to simply on valuation.

Companies perform follow-on offerings for a wide assortment of reasons. Now and again, the company could basically have to raise capital to finance its debt or make acquisitions. In others, the company's investors may be interested in an offering to cash out of their holdings.

A few companies may likewise conduct follow-on offerings to raise capital to refinance debt during times of low interest rates. Investors ought to be conscious of the reasons that a company has for a follow-on offering before placing their money into it.

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 happen when a company issues additional shares to raise funding and offer those shares to the public market. As the number of shares builds, the earnings per share (EPS) diminishes. The funds raised during a FPO are most often allocated to reduce debt or change a company's capital structure. The infusion of cash is great for the long-term outlook of the company, and in this manner, it is likewise really great for its shares.

Non-Diluted Follow-on Offering

Non-diluted follow-on offerings happen when holders of existing, privately-held shares carry previously issued shares to the public market available to be purchased. Cash proceeds from non-diluted sales go directly to the shareholders setting the stock out of the shadows market.

As a rule, these shareholders are company founders, individuals from the board of directors, or pre-IPO investors. Since no new shares are issued, the company's EPS stays unchanged. Non-diluted follow-on offerings are additionally called secondary market offerings.

Illustration of a Follow-on Offering (FPO)

A widely discussed follow-on offering was that of Alphabet Inc. subsidiary Google (GOOG), which conducted a follow-on offering in 2005. The Mountain View company's initial public offering (IPO) was conducted in 2004 utilizing the Dutch Auction method. It raised roughly $1.67 billion at a price of $85 per share, the lower end of its evaluations. In contrast, the follow-on offering conducted in 2005 raised more than $4 billion at $295, the company's share price a year after the fact.

In mid 2022, AFC Gamma, a commercial real estate company that makes loans to companies in the weed industry, announced that it would direct a follow-on offering. The company would hope to offer 3 million shares of its common stock at a price of $20.50 per share. The underwriters of the offering have a 30-day period where they can opt to buy an additional 450,000 shares.

The company gauges gross proceeds from the sale to be roughly $61.5 million. The proceeds from the sale of additional common stock will be to fund loans made to companies in the industry and for working capital needs.

Features

  • Raising capital to finance debt or making growth acquisitions are a portion of the reasons that companies embrace follow-on offerings (FPOs).
  • Diluted follow-on offerings (FPOs) bring about lower earnings per share (EPS) in light of the fact that the number of shares in circulation increments, while non-diluted follow-on offerings (FPOs) result in an unchanged EPS in light of the fact that it includes carrying existing shares to the market.
  • A follow-on offering (FPO) is an offering of shares after an initial public offering (IPO).

FAQ

What Is the Difference Between a Follow-on Offering and an Initial Public Offering?

An initial public offering (IPO) is the point at which a private company opens up to the world, listing its shares on an exchange interestingly for the public to purchase. A follow-on offering is the point at which a generally existing public company (one that has completed an IPO) offers more shares to the public to raise additional capital.

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 from the company that are recently 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 Follow-on Financing?

Follow-on financing is the point at which a startup that has previously raised capital raises additional capital through one more round of funding. This is in the private space before the beginning up has gone public.