Secondary Offering

What Is A Secondary Offering?

A secondary offering refers to either the sale of shares by existing shareholders on the secondary market or the issuance of additional shares by a company that is already publicly traded.

An offering is the sale of a security by a company or existing shareholders, including stock, bonds, or other securities. One type is the initial public offering (IPO), where a company makes its stock available to the public for the first time and becomes publicly traded.

After a company completes an IPO, existing shareholders may choose to sell their shares, or the company itself may want to raise more capital by issuing new shares. Secondary offerings can be used to describe both situations.

In the first scenario, previously issued shares are sold by existing shareholders, often through intermediaries such as investment banks. Typically, company insiders, such as executives and founders who hold a significant portion of shares, are the ones making a secondary offering.

The proceeds go directly to the selling shareholders, and the issuing company neither receives money from the sales nor issues any new shares. It can also be called a secondary distribution.

In the second scenario, the public company itself decides to issue additional shares to raise more capital in what is also known as a seasoned equity offering (SEO) or a follow-on offering.

The additional funds generated through these can be used for various purposes, such as funding new projects, acquiring other companies, or dealing with financial difficulties.

Types of Secondary Offerings

There are primarily 2 types of secondary offerings. 

It's important to distinguish between two types: non-dilutive and dilutive. The main difference is whether a company will create new shares or existing shareholders sell their holdings to the public.

Let’s understand them below:

Non-dilutive

A non-dilutive secondary offering does not dilute existing shares since no new shares are created. 

It allows existing shareholders, such as founders or executives, to sell their shares on the market. They may do this to gain liquidity or generate funds for personal or business needs.

While they do not raise new capital for the company, they can improve trading liquidity by increasing the number of shares available for investors to trade.

Such offerings typically occur after the IPO lock-up period ends, a predetermined time period during which significant shareholders are prohibited from selling their shares. 

These shareholders often sell their shares to large investors who can match the supply. This is often preferred over selling to smaller retail investors. Doing this helps keep the price steady by avoiding overwhelming the market with many shares.

Dilutive

In contrast, a dilutive offering occurs when the company itself issues new shares to raise additional capital. This increases the total number of outstanding shares.

As a result, unless existing shareholders take part in the offering to maintain their proportional stake, their percentage ownership in the business will decrease. The diluting effect happens because ownership is distributed among more shares. 

Issuing additional shares is an effective way to raise funds. The dilutive offering can increase the company’s overall value, but it may reduce the earnings of initial investors. Companies often do this to finance growth initiatives.

Difference

Both types take place after a company has already completed an IPO. The key difference is whether new shares are issued. 

The non-dilutive type happens when existing shareholders sell their privately held shares. No new shares are created, thereby not affecting the value of existing shares. 

This often involves company insiders, like executives or venture capitalists. Selling those shares allows people to gain liquidity and diversify their holdings.

The dilutive type happens when the company itself issues new shares. This increases the total number of outstanding shares, thereby diluting existing shares' value. 

Companies do this to raise capital for operations, expansion, or other strategic activities.

Secondary Offerings: Primary vs. Secondary Market

Secondary offering is an important part of the financial markets. They allow companies and investors to address their respective interests after an IPO. 

Depending on the purpose of the offering, it can happen in primary or secondary markets. 

The key differences between the two markets are:

A dilutive secondary offering, also known as a follow-on offering, is a secondary offering conducted in the primary market. In other words, it is an offering after an IPO in the primary market.

In contrast, a non-dilutive type can be seen as an offering in the secondary market. It can also be referred to as a secondary distribution.

In practice, companies sometimes issue a mix of both types of offerings, which may cause the terms to be used interchangeably.

Some refer to any post-IPO offering as a “secondary offering,” while others use the term specifically for transactions between investors on the secondary market.

Example

For example, in 2013, Meta (previously Facebook) priced a follow-on offering of 70,000,000 shares at $55.05 each. This included both dilutive and non-dilutive offerings:

• Dilutive: 27,004,761 shares were offered by Facebook.
• Non-dilutive: A total of 42,995,239 shares were offered by selling stockholders, including 41,350,000 shares from Mark Zuckerberg

The interchangeable use of these terms in practice, particularly between dilutive and non-dilutive offerings, can be confusing. It’s better to focus on the specifics of the offerings (e.g., Who is offering the shares) rather than the labels themselves. 

Effects of Secondary Offerings

Secondary offerings can have many effects on a company, including:

Current Shareholders

A secondary offering can affect current shareholders differently depending on the type of offering. Here's how dilutive and non-dilutive offerings each impact shareholders:

Dilutive offerings: 

• The company issues new shares, increasing the total number of shares available
• The ownership percentage of current shareholders and the value of each share may decrease
• Voting rights and dividend distributions can also be impacted

Non-dilutive offerings:

• Existing shareholders who sell their shares will have fewer shares.
• Other current shareholders retain the same ownership percentage, voting rights, and dividend distributions.

Market Perception

How the market views these offerings differ based on their types and goals.

Dilutive offerings can be positive and negative. On the negative side, they may signal a need for cash or financial stress. On the other hand, investors may view them positively when the sale proceeds are used for business growth, acquisition, or expansion.

Non-dilutive offerings can influence market perception, especially when significant shareholders, such as founders or executives, sell substantial portions of their stock, potentially raising concerns about their confidence in the company's future.

The market might see this as a signal that these insiders lack confidence in the company's future outlook.

There are some ways to help manage market sentiment. For example, businesses are clear and transparent about the purpose of the offering. When there is a clear and positive strategic reason, the market is more likely to respond positively.

Stock Price

A secondary offering often causes the share price to drop in the short term, but how the market reacts can vary depending on the situation.

For dilutive offerings:

• An increase in the share supply often leads to a decrease in the price per share, especially if demand does not match the new supply.
• Current shareholders might dislike the dilution and choose to sell their shares. This increases the supply of shares and pushes the price down even further.
• If the market views the reasons for the offerings as positive for growth, the price may stabilize or even rise.
• Conversely, if it is seen as a sign of financial trouble, the price will likely fall.

For non-dilutive offerings, sales by large shareholders can cause potential concern. As a result, the stock price can go down. 

In the long term, the impact on the share price depends on the outcomes of the offering and the company’s overall performance.

When funds raised through the issuance of new shares are used effectively, such as profitable investments, short-term declines can be offset, potentially driving long-term gains.

Similarly, non-dilutive offerings might have little to no lasting impact, especially if the business maintains strong fundamentals and promising growth prospects. In such cases, the stock can recover and even exceed its pre-offering levels.

Examples Of Secondary Offerings

Viking Holdings Ltd (NYSE: VIK) announced the pricing of its secondary public offering of 30,000,000 shares at $31.00 per share. 

Viking’s press release stated it was not issuing new shares and would not receive proceeds from the sale, making this a non-dilutive offering where existing shareholders sold their shares directly. 

In October 2024, Boeing announced two separate underwritten public offerings:  

1. 112,500,000 shares of common stock at $143.00 per share, expected to raise around $15.81 billion in net proceeds
2. $5 billion of depositary shares, expected to generate around $4.91 billion in net proceeds

This is an example of a dilute type. 

Boeing planned to use the net proceeds for general corporate purposes, such as debt repayment, additions to working capital, and capital expenditures.

In February 2020, Tesla priced a secondary offering of common stock to raise around $2 billion. According to Tesla, the net proceeds would be utilized for general business activities and further strengthen its balance sheet.

The stock price was up 5% the day the offering was announced. Some news outlets suggested that the rise was related to investor confidence. The concerns about dilution outweigh Tesla's present growth and expansion.

This example illustrates that dilutive offerings do not always lead to a price drop, especially when investors view the raised capital as supporting future growth or strengthening the company's financial position.

Free Resources

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