Follow-On Offering

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Last Updated:January 24, 2024

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What Is A Follow-on Public Offer (FPO)?

A follow-on offering also referred to as a follow-on public offering (FPO), is a kind of stock issuance when a firm that has previously gone public issues more shares of its stock to raise more money.

This differs from an initial public offering (IPO), which is the first time a firm issues shares to the general public.

Follow-on offerings are typically done by firms that wish to obtain more funds for a definite purpose, such as financing new initiatives, repaying debt, or making acquisitions. Before investing their money, investors should understand why a firm is making a follow-on offering.

An FPO bases its pricing on the current market price of the company's shares, unlike an IPO which is based on its health and performance and the price per share it intends to reach during the first offering.

The fact that the company's shares are traded publicly enables investors to evaluate the company before purchasing shares. Usually, the cost of follow-on shares is less expensive than the current closing market price.

Historically, many companies have issued follow-on offerings to reap the advantages this procedure offers publicly-traded companies.

For instance, in a follow-on offering in 2005, Google sold 14,159,265 Class A common shares at $295.00 apiece. Following its initial public offering, Tesla too frequently issued more shares. In 2011 and 2012, they respectively issued 5,300,000 and 4,344,930 fresh shares of common stock

Key Takeaways

A follow-on offering, also known as a follow-on public offering (FPO), involves a company issuing additional shares of its stock after its initial public offering (IPO). This allows the company to raise more capital from the public.
Companies opt for FPOs to achieve diverse objectives, such as raising capital for expansion, financing new projects, repaying debts, or making acquisitions. FPOs are priced based on the current market value of shares, as opposed to IPOs that focus on initial offering price.
FPOs offer benefits like capital infusion for expansion and research, enhanced liquidity due to increased shares, and potential shareholder diversification. Companies can use FPOs to gauge market sentiment and enhance their reputation through increased publicity.
FPOs come in several types including dilution, non-dilution, secondary offering, rights offering, and bought deal. Each type serves specific purposes, but companies must weigh the pros and cons before proceeding with an FPO to ensure it aligns with their goals.

Reasons to Offer an FPO

An FPO is a popular way for companies to raise capital for various reasons. The following are some of the reasons why a company may choose to go for a follow-on offering.

1. Capital Raise

One of the primary reasons why a company offers an FPO is to raise capital. An FPO allows a company to issue new shares to the public, which they can purchase.

This new infusion of capital can help the company fund its expansion plans and research and development activities or pay off any outstanding debts.

2. Price Discovery

An FPO is an excellent way for a firm to find out the current market value of its shares. The corporation can assess investors’ sentiments and ascertain the fair market value of its shares by issuing fresh shares to the general public.

The company management may find this information vital in assisting them in making defensible choices on upcoming capital-raising initiatives.

3. Increased Liquidity

Another advantage of offering additional shares is increased liquidity. The corporation raises the number of shares accessible on the market by issuing more shares, which makes it simpler for investors to acquire and sell shares.

A more active and energetic market might benefit the firm and its shareholders due to increased liquidity.

4. Shareholder Diversification

A follow-on public offering can also be an opportunity for existing shareholders to sell their shares in the company. This can benefit shareholders who want to diversify their portfolios or exit their investment in the company altogether.

Note

By offering additional shares, the company can provide an exit option for these shareholders, which can help maintain a stable shareholder base.

5. Publicity and Prestige

Offering an FPO can also provide a company with increased publicity and prestige. Going public is often seen as a significant milestone for a company, and a follow-on offering can further enhance its reputation.

Additionally, the increased media attention can help the company attract new investors and customers.

6. Mergers and Acquisitions

An FPO can also be a strategic tool in mergers and acquisitions. For example, a company can offer an FPO to raise capital to fund an acquisition, or the shares issued through the FPO can be used as currency to acquire another company.

Note

An FPO may be a great approach for a business to meet its growth goals and satisfy its shareholders. However, a business should carefully weigh the advantages and disadvantages of this kind of service before making an FPO available and ensuring it is the best option for its specific circumstances.

Types of FPOs

There are several types of follow-on offerings, such as:

1. Dilution FPO

A dilution FPO is when a company issues new shares to raise additional capital, which can dilute existing shareholders' ownership stake. This kind of FPO is often utilized when a business wants to generate money for expansion, R&D, or to settle existing obligations.

2. Non-dilution FPO

Sometimes, a firm may sell its current shares to the public instead of issuing new ones. This type of offering is called a non-dilution FPO. As opposed to the firm itself, current shareholders who want to sell their shares often employ this sort of FPO.

3. Secondary Offering

A secondary offering is when a company offers shares that are already publicly traded to the public. Instead of being used by the business to generate money, this FPO is often used by current shareholders who wish to sell their shares.

4. Rights Offering

In a rights offering, a firm grants its current shareholders the option to buy more shares of the company's stock at a reduced price. This type of FPO is typically used to raise capital from existing shareholders rather than from the general public.

5. Bought Deal

A bought deal is a type of FPO in which an investment bank agrees to purchase all of the new shares a company plans to issue and then resell them to its clients.

Note

Companies that wish to swiftly acquire funds while avoiding the dangers of a regular public offering frequently employ Bought Deal FPO.

Procedure for Issuing a Follow-On Offering

The procedure for issuing a Follow-on Public Offering (FPO) involves several steps and can be quite complex.

Here is a general overview of the process in a step-by-step manner:

1. Plan the FPO

The company must first decide to issue a follow-on offering, and determine the number of shares to be offered and the price at which they will be offered. The company will also need to engage investment banks to act as underwriters for the offering.

2. Prepare the Registration Statement

The firm must then file a registration statement. This statement contains detailed information about the company, its business, and the proposed offering.

The registration statement must be submitted to the country's oversight agency/regulatory body (Securities and Exchange Commission in the USA, Securities and Exchange Board of India in India).

Information regarding the company's financial situation, management's analysis, selling stockholders, underwriters, and the hazards of investing in the business are all included in this statement.

3. Review by the Regulatory Body

The regulatory body of the country where the offering is issued will review the registration statement.

The regulatory body reviews the registration statement and provides feedback to the company regarding any deficiencies or concerns. The company may need to amend the registration statement to address these concerns.

The regulatory body may also ask the firm for further details or supporting documents or may even interview the company's management or other important employees.

Note

The review procedure guarantees the investors complete and equitable disclosure of all relevant information they require to make wise investment decisions.

4. Roadshow

Once the registration statement gets approval, the company will conduct a roadshow to market the offering to potential investors.

Roadshows typically involve a series of meetings and presentations with investors, either in person or via videoconference. During the roadshow, the company's management team presents information about the company, its financial performance, and the proposed offering.

Companies can also generate publicity for their FPO through press releases, media interviews, and other public relations activities. This can help to generate interest in the offering and raise the company's profile among investors.

Institutional investors, such as hedge and pension funds, might also be targeted by businesses as possible FPO investors. These investors often have large pools of capital to invest and can influence the pricing and success of the offering.

5. Pricing

To determine the final price of the FPO, the company typically engages investment banks to conduct a book-building process.

During the book-building process, the investment banks solicit indications of interest from potential investors at different price levels. Based on these indications of interest, the company and its investment banks can determine the optimal price at which to price the offering.

The final price is typically high enough to generate sufficient demand and raise the desired amount of capital while being attractive enough to investors to ensure that the shares are fully subscribed.

6. Closing

At the offering price, the underwriters will buy the shares from the corporation and subsequently resell them to the general public. The underwriting commissions and other costs will be deducted from the share sale profits before being distributed to the firm.

Note

The firm will have continuous reporting obligations following the offering, including submitting quarterly and yearly filings with the regulatory body.

FPO vs. IPO

Both Initial Public Offering and Follow on Public Offering involve selling stocks of a firm.

The two sets of offerings differ in a few ways, though:

FPO Vs. IPO
Initial Public Offering (IPO)	Follow-On Public Offering (FPO)
Initial public offering or an IPO is the issuance of shares on the stock market for the first time.	The issuance of shares following the company's listing on the stock market is known as a follow-on public offer.
An IPO serves the objective of helping a business raise money by selling a part of its stock to the general public for the first time.	An FPO is designed to help companies that have previously gone public and are looking to grow or fund new projects, and raise more money.
IPOs are generally considered riskier than FPOs because the company has no track record of performance, and the public has no history of trading the company's stock.	FPOs, on the other hand, are typically less risky because the company has already established itself, and the public has a history of trading its stock.
Going public for the first time makes a corporation more likely to draw institutional and individual investors eager to stake their money in a new, emerging enterprise.	In an FPO, the company is more likely to attract existing investors who are familiar with the company and its performance.

Also, keep in mind that IPOs usually have larger sizes than FPOs. In contrast to an IPO, which frequently entails selling a sizable portion of a company's shares to the public for the first time, an FPO typically involves issuing fewer shares.

Moreover, IPO expenses are sometimes higher than FPO costs. This is because an IPO frequently involves more marketing and underwriting costs, and a more complicated regulatory process for a company.

What are the potential disadvantages of a follow-on offering?

One disadvantage of offering additional shares is that it can dilute the ownership stakes of existing shareholders, reducing their percentage ownership of the company.

Additionally, FPOs can be costly and time-consuming for companies to execute, with fees associated with underwriting and legal services. The corporation could also divulge more information to the public, resulting in more regulatory oversight and possible legal threats.

Lastly, if not well-received by investors, a follow-on public offering may tamper the firm's reputation and make it tougher for the business to raise capital.

What happens if a follow-on offering is oversubscribed?

When an FPO is fully subscribed, investors have bought all of the company's issued shares and have a higher demand for the shares than what is available. In this case, the corporation would have successfully used the offering to raise the required money.

The corporation may distribute shares to investors pro-rata if the FPO is oversubscribed. Hence, the investors may only receive a fraction of the stocks they seek.

The market views an oversubscribed follow-on offering as evidence of investor confidence in the company's growth prospects. Hence, an oversubscribed FPO can result in stock price appreciation.

What happens if a follow-on offering is undersubscribed?

Because the market may view an undersubscribed FPO as an indication of weak investor demand for the shares, it may have a detrimental effect on the company's share price.

This could cause the share price to fall since investors may believe the company's growth prospects aren't as attractive as they imagined.

If an FPO is undersubscribed, the company may adjust the offering price to attract more investors. But, if the company cuts the offering price too much, investors might consider the company worthless, and the share price may drop even further.

Sometimes, an undersubscribed FPO may delay or cancel the offering, eroding investors' confidence in the firm. Because an undersubscribed follow-on offer may be perceived as a sign of management's inability to execute its growth strategy.