Secondary Offering
An investor selling publicly traded shares to the general public on the secondary market
What is a Secondary Offering?
A Secondary Offering refers to the sale of shares of a company that has already gone public. In this type of offering, the company itself does not receive any funds; instead, the proceeds go directly to the stockholders selling their shares through the secondary market
These securities are shares the corporation has already sold through an initial public offering (IPO). Instead of going to the corporation, the funds from a secondary offering are given to the stockholders who sell their shares.
Some businesses might provide supplementary offerings, often known as follow-on offerings. These offerings can be either non-dilutive or dilutive secondary offerings.
After an IPO, a secondary offering takes place when an investor sells their shares to the public on the secondary market. Proceeds from this go to the investor personally rather than the issuing firm.
To raise money, liquidate shares, etc., corporations may sell shares through secondary markets, often known as follow-on offers. Follow-on offers can be non-dilutive, where no additional shares are produced, or dilutive, where additional shares are generated.
An offering is when a corporation starts to sell shares of stocks, bonds, or other securities to the general public. Initial public offerings (IPOs) are frequently mentioned when discussing stock purchases, but businesses may also make other sales forms to raise capital.
Key Takeaways
- A secondary offering is the sale of existing shares of a publicly traded company, with the proceeds going to selling shareholders, not the company itself.
- Secondary offerings can be either non-dilutive (no new shares created) or dilutive (new shares issued), impacting existing shareholders and stock price.
- Stock prices often decline after dilutive secondary offerings, but reactions can vary based on investor perception of the offering's purpose.
- Secondary offerings are influenced by the law of supply and demand, and their impact on stock price depends on factors like company strategy and investor sentiment.
understanding Secondary Offering
Following an initial public offering (IPO), a corporation may make additional offers, also known as seasoned offerings or follow-on public offerings (FPO), in which it sells additional shares on the market or issues convertible notes.
These are low-interest notes that, often after five to ten years, can be exchanged into shares.
A secondary stock offering can be used to describe any of these.
Businesses may make these offers when they need money, want to grow their firm, buy another company, or when their stock is performing well and fuel investor demand with a constrained supply of extra new shares.
To raise money, private businesses may decide to sell stock to investors through an IPO. An IPO, as the name suggests, is the initial public offering of shares by a company. Investors are offered these brand-new securities on the open market.
Investors may launch secondary offers to the general public on the stock market after the IPO is finished. As was already noted, investors hold the securities sold in a secondary offering and sell them to one or more investors via a stock exchange.
As a result, the seller receives the money from an offering rather than the business that issued the shares.
This offering aids businesses in raising funds so they can increase their operations, similar to an IPO. This may be a quick and effective way for companies to raise substantial sums.
Between their IPO and the conclusion of the stock's lock-up period, during which significant shareholders are prohibited from selling shares, companies may conduct a second offering.
When these stockholders sell some of their shares after the lock-up period, the stock price frequently decreases. As a result, more investors can profit from the success of an IPO by holding a secondary offering before the lock-up period expires.
Before making an investment decision, investors should consider a company's offering strategy because it may impact the stock price in the short- and long-term.
Secondary Offerings Categories
There are two types. The first is a non-dilutive offering, whereas the second is a dilutive offering.
The variations between each are described below.
Non-dilutive
Because no new shares are generated, a non-dilutive secondary offering does not dilute the shares owned by current shareholders.
Because the shares are being offered for sale by private shareholders, such as directors, business insiders, venture capitalists, etc., who desire to sell their holdings, the issuing company does not stand to gain anything.
The increased shares offered to enable more institutions to establish substantial stakes in the issuing business, perhaps improving the shares' trading liquidity. After the lock-up period has ended, this form of offering is typical in the years following an IPO.
Dilutive
A subsequent or follow-on public offering are other names for a dilutive offering. This happens when a firm issues its new shares, diluting existing ones.
When the board of directors of a firm decides to increase the share float to sell more equity, this offering takes place.
The dilution of earnings per share (EPS) results from an increase in the number of outstanding shares. The consequent increase in cash can aid the business in achieving its longer-term objectives, settling debt, funding expansion, etc.
For certain stockholders, this might not be advantageous in the short run.
Impact of Secondary Offerings on Stock Price
The share price of a company and investor mood can be affected through secondary offers. Investors can expect bad news, for instance, if a significant shareholder sells a sizable portion of their stock, particularly a company principal.
Capri Holdings is a perfect example of how a secondary offering can negatively impact a company's share price. On February 19, 2013, the business disclosed an offering of 25 million shares.
The company's stock price decreased by more than 10 percent from a closing price of $64.84 on February 19, 2013, to $57.86 by February 25, 2013. Share prices often decline due to a dilutive secondary sale, although markets occasionally react unexpectedly to the offering.
For instance, CRISPR Therapeutics (CRSP) observed a surge in its stock value following the announcement on January 4, 2018, of a secondary offering of five million shares.
The stock had finished at $23.52 on January 3, 2018, and, after the announcement of the offering on January 4, the price of CRISPR closed at $26.81 on January 5, representing a nearly 14% increase.
It's not always easy to pinpoint why a stock's price rose after the offering. Investors may react favorably to the offering when they think the sale's proceeds might benefit the company.
When a business utilizes the proceeds to reduce debt, make an acquisition, or invest in the company's future, the offering will generally be well-received.
The fundamental law of supply and demand states that the cost of something will lower as more of it becomes available. This generally happens during a secondary offering, but it's not always the case.
The price of the shares may decrease if more are issued, especially in the case of dilutive offerings, which can lower the stock's earnings per share.
Due to the corporation issuing the offered shares at a reduced price to entice investors to acquire shares, the stock price might also drop in the secondary market.
Because any investors who buy in at the discounted price can sell for a small gain and make a profit, the value decline may endure for a while.
Price volatility is typically minimized when a corporation issues additional shares and sells them at market value with a discount to reflect the degree of dilution. Although it frequently causes a drop in stock price, it doesn't always have that effect.
Non-dilutive offers are seen more favorably because they do not impact the stock's earnings per share or the percentage of ownership held by shareholders. If a firm invests in expansion and acquisitions, it might be interpreted as a positive sign for the stock's long-term value.
Many secondary offers are unrestricted, but a few may need to go through a lock-up period, akin to an IPO, where investors aren't allowed to sell their shares.
Secondary vs. primary offerings
There are various kinds of secondary offerings, but the distinction between secondary and primary offerings is pronounced.
Raising money is one of the main goals of any primary offering. Companies issue additional shares to investors in exchange for money that is used to fund operations, make acquisitions, and further other corporate objectives.
Business investors who previously owned shares can trade them in a secondary stock offering. A business can also choose to issue new shares.
Investors buy and sell shares of publicly traded corporations directly to one another on the secondary market. As a result, the issuing firm does not receive any additional capital.
Primary Market Benefits
Neither the primary nor secondary markets should be considered superior to one another.
Understanding the benefits of both markets is crucial if you want to use them effectively for your investing. Here are a few of the primary market's distinctive advantages:
- First, companies can raise capital for a reasonable price.
- An excellent technique to lower risk through diversification
- Absence of market alterations
- Due to the ease of trading on public exchanges, public shares are pretty liquid.
- This industry might attract direct foreign investors.
- Decrease in pricing manipulation
Secondary Market Benefits
Primary and secondary markets have their merits, so weighing these two financial spheres is essential. But, of course, the most visible benefit is the possibility for newer investors to reach the secondary market.
The following are only a few of the most notable benefits of the secondary market:
- Trading in the secondary market is feasible because it doesn't require abundant capital or resources.
- Investors can experience significant gains in a short amount of time.
- Examining stock prices makes determining a company's viability and success simple.
- Stocks can be easily bought and sold by investors, ensuring liquidity.
Secondary Offering Examples
The owner and CEO of Meta (previously Facebook), Mark Zuckerberg, stated in 2013 that he would sell 41,350,000 shares in a secondary sale to the general public. The shares were sold for $55.05 each, raising around $2.3 billion.
According to Zuckerberg, he planned to use some of the money to settle a tax debt.
In 2014, Rocket Fuel stated that it would sell an additional 5,000,000 shares in a follow-on offering for $61 each, raising a total of $305,000,000. The decision was made to take advantage of the company's high share price and a solid fourth quarter in 2013.
The corporation sold two million shares, while some existing owners sold perhaps three million. In the sale, underwriters had the option to buy 750,000 shares.
At its initial public offering (IPO) price of $85.00 per share on August 18, 2004, Alphabet's Google (GOOG) sold 14,142,135 shares of common stock, raising more than $1.168 billion for the business.
A follow-on public offering of 14,159,265 shares of common stock was made by Google Inc. one year later, on September 14, 2005, raising approximately $4.17 billion.
Researched and authored by Ruxue Bai | LinkedIn
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