Secondary Offering

What Is a Secondary Offering?

The term secondary offering alludes to the sale of shares owned by an investor to the overall population on the secondary market. These are shares that were at that point sold by the company in a initial public offering (IPO). The proceeds from a secondary offering are paid to the stockholders who sell their shares as opposed to the company.

A few companies might offer follow-on offerings, which may likewise be called secondary offerings. These offerings can take on two unique forms: non-dilutive and dilutive secondary offerings.

How Secondary Offerings Work

Privately owned businesses that need to raise capital might decide to sell shares to investors through an initial public offering. As the name infers, an IPO is whenever a company first offers shares to the public. These are new securities that are sold to investors on the primary market. The corporation can utilize the proceeds to fund its everyday operations, make acquisitions, or for different purposes.

Once the IPO is complete, investors can make secondary offerings to the public on the secondary market or the stock market. As mentioned above, securities sold in a secondary offering are held by investors and sold to at least one different investors through a stock exchange. In that capacity, the proceeds from a secondary offering go straightforwardly to the seller — not the company whose shares change hands.

At times, a company might perform a secondary offering — called a follow-on offering. This need might emerge to raise capital to finance its debt, make acquisitions, or fund its research and development (R&D) pipeline.

In different cases, investors might illuminate the company regarding their desire to cash out of their holdings, while different companies might offer follow-on offerings to refinance debt when interest rates are low.

As an investor, ensure you comprehend the reasons why a company has a follow-on offering before you put your money into it.

Types of Secondary Offerings

Secondary offerings come in two unique forms. The first is a non-dilutive offering while the other is alluded to as a dilutive secondary offering. We've framed the differences between each below.

Non-Dilutive Secondary Offerings

A non-dilutive secondary offering doesn't weaken shares held by existing shareholders on the grounds that no new shares are made. The responsible company probably won't benefit at all in light of the fact that the shares are offered available to be purchased by confidential shareholders, like directors or different insiders, like company insiders or venture capitalists, who need to expand their holdings.

The increase in available shares allows more institutions to take non-minor positions in the responsible company, which might benefit the trading liquidity of the responsible company's shares. This sort of secondary offering is common soon after an IPO, after the termination of the lock-up period.

Dilutive Secondary Offerings

A dilutive secondary offering is otherwise called a resulting offering or follow-on public offering (FPO). This offering happens when a company itself makes and places new shares onto the market, hence weakening existing shares. This offering happens when a company's board of directors consents to increase the share float to sell greater equity.

At the point when the number of outstanding shares increases, this causes the dilution of earnings per share (EPS). The subsequent deluge of cash assists the company with accomplishing its longer-term objectives, or taking care of debt or finance expansion can be utilized. This may not be positive for the more limited term horizons of certain shareholders.

Secondary offerings are typically marketed inside a couple of days as opposed to half a month, which is common for IPOs.

Effects of Secondary Offerings

Secondary offerings can impact investor sentiment and a company's share price. For instance, investors might expect terrible news if a large shareholder (particularly a company principal) sells a critical number of shares.

An illustration of a company's share price being adversely impacted by a secondary offering happened with Capri Holdings (CPRI). The company announced a secondary offering of 25 million shares on February 19, 2013. The company's stock price fell by over 10% from a closing price of $64.84 on February 19, 2013, to $57.86 by February 25, 2013.

A dilutive secondary offering typically brings about a drop in share prices, however in some cases, markets can have a surprising reaction to the offering. For instance, CRISPR Therapeutics (CRSP) saw an increase in its stock price subsequent to declaring a secondary offering of five million shares on January 4, 2018. On January 03, 2018, the stock had closed at $23.52, and following the offering announcement on the fourth, CRISPR's stock price closed at $26.81 on January fifth for almost a 14% gain.

The specific reason at a rising stock cost following a secondary offering may not be apparent 100% of the time. Now and again, investors respond well to the offering assuming it's accepted that the proceeds from the sale might help the company. Instances of a well seen offering could incorporate when a company utilizes the funds to pay down debt, make an acquisition, or invest in the company's future.

Genuine Examples of Secondary Offerings

In 2013, Mark Zuckerberg, the organizer, and executive of Meta, (formerly Facebook), announced he was selling 41,350,000 shares he held personally in a secondary offering to the public. At a selling price of $55.05 per share, roughly $2.3 billion was raised. Zuckerberg stated he was to utilize a portion of the proceeds to pay a tax bill.

Rocket Fuel announced in 2014 that it would sell in a follow-on offering an additional 5,000,000 shares at $61 per share for a total of $305,000,000 raised. The move was incited by a strong 2013 fourth quarter and a craving to capitalize on its high share price. The company sold 2,000,000 shares, while certain existing shareholders sold roughly 3,000,000. Additionally, underwriters had the option to purchase 750,000 in the offering.

On August 18, 2004, Alphabet's Google (GOOG) offered 14,142,135 shares of common stock at its initial public offering (IPO) price of $85.00 per share, raising more than $1.168 billion for the company. After one year, on September 14, 2005, Google Inc. issued a follow-on public offering of 14,159,265 shares of common stock at a price of $295.00 per share for an estimated total of $4.17 billion.

Highlights

• A secondary offering happens when an investor sells their shares to the public on the secondary market after an initial public offering (IPO).
• Corporations can likewise sell shares through secondary offerings, which are additionally alluded to as follow-on offerings, to raise capital or for different reasons.
• Follow-on offerings can be either dilutive, which brings about an increase in shares, or non-dilutive, where new shares are not made.
• Proceeds from an investor's secondary offering go straightforwardly into an investor's pockets instead of to the company.