All About Follow-On Public Offerings: What Investors Should Understand

When a public company offers more shares to investors, it makes a Follow-On Public Offer. This usually follows a company's IPO. An IPO is a company's first step to market entry by selling shares. FPOs are additional shares offered by a well-known company.

A company issues an FPO to raise capital. This can finance new projects, pay off debt, or grow the company. The corporation gets all the extra share sales proceeds. The firm must submit paperwork to the US SEC to start an FPO.

Types of FPOs

Follow-on public offers fall into two categories:

Diluted Follow-on Public Offering (FPO)

A company sells more shares to raise capital in an expanded follow-on public offering. This reduces EPS and increases share count.

Companies use FPO money to reorganize capital or consolidate debt. Over time, the capital infusion will boost the company's stock price. Businesses must grow a follow on public offer to improve their finances and market position.

Non-Diluted Share Follow-on Offering

Existing shareholders like founders, board members, and early investors may sell their private shares through a retained share or non-diluted follow-on offering. Since this offering does not create new shares, the company's EPS remains unchanged.

Selling stock gives shareholders a portion of the proceeds. This technique is essential to public stock trading and IPOs. It lets major shareholders profit from their investments without changing the company's share structure.

Why Companies Opt for a Follow-On Public Offer

Paying Off Existing Debt

When a public company decides to release more shares, a common motive is to gather additional funds for the business. One key reason is debt management. A company may issue a follow on public offer if it is under a heavy debt burden. This strategy helps them reduce their existing debt.

Rebalancing Capital Structure

Another reason for a company to release more shares in the market is to adjust its financial foundation. The company aims to maintain a healthy balance between debt and equity by increasing its equity through a follow on public offer.

Addressing Insufficient Funds from IPO

The capital raised in an IPO may not cover all expansion plans. In this case, a follow on public offer could raise funds for the company. They need this capital to expand production, enter new markets, or improve products.

Financing New Projects Without Increasing Debt

Lastly, a company might prefer to raise funds by issuing shares rather than taking on more debt. This approach is particularly relevant when they plan to finance new projects, acquisitions, or business expansions. The company can fund its new ventures without the added burden of interest expenses by issuing public stocks instead of increasing debt.

Impact of a Follow-on Public Offer on Investors

Opportunity of a Follow-on Public Offer

When a company announces a follow-up Public Offer (FPO), it presents a chance for investors interested in that company's business. An FPO's price range is usually lower than the market price to attract buyers.

This could be a great time to buy the company's stock cheaply. More information about the company's history, management, and operations is available than during an IPO. FPO investments are safer than IPOs. Knowing these factors helps investors make better decisions.

Non-Diluted and Diluted FPOs

In a Non-Diluted FPO, where current private investors are selling their shares, it's important to investigate why they choose to sell. This research helps understand the company's motives for the FPO and its future potential. On the other hand, a Diluted FPO involves issuing new shares.

This can affect the Earnings Per Share (EPS) as the number of shares increases. The company's earnings might also change if it uses the raised funds to reduce debt or expand. Such investments could lead to higher long-term earnings. Understanding these dynamics is crucial for existing shareholders as it impacts their shareholding percentage and EPS.

Considerations for Investors in FPO

Investors considering an FPO need to assess how the company plans to use the raised funds and the potential impact on the company’s earnings. In the case of a Diluted FPO, the issuance of new shares can lead to changes in EPS owing to an increase in the total number of shares.

If the company uses the proceeds to cut down its debt, it might save on interest payments, positively affecting its earnings. Alternatively, if the funds are invested in business growth, it can boost the company’s future profits. This information is vital for new and existing investors to understand how their investments and returns might change post-FPO.

Example

In 2005, Google made a follow on public offer, releasing 14,159,265 shares of Class A common stock at $295 each. This move followed their initial public offering and was a significant step in their financial strategy.

Fast forward to 2013, Facebook made headlines with its announcement to release 27,004,761 new shares in the market. In addition, existing shareholders put 42,995,239 shares for sale, including 41,350,000 shares from their CEO, Mark Zuckerberg. This sale of public stocks was to gather funds to support Facebook's corporate activities and enhance its working capital.

Tesla, known for its innovative approach to the automotive industry, has been active in the financial markets since its initial public offering. They issued 5,300,000 new shares in 2011 and another 4,344,930 in 2012.

Entering 2020, Tesla announced a significant follow-on public offer valued at $2 billion. Not stopping there, they went for an even more extensive offering in December of the same year, putting $5 billion worth of stock into the market. These strategic financial moves have been crucial to Tesla's growth and expansion plans.

FPOs vs. IPOs

FPOs differ significantly from IPOs, especially in determining share prices. In an IPO, the company and its underwriters set the share price. However, in an FPO, the share price is influenced by current market conditions because the company is already public, and its shares are traded on the stock exchange. This aspect allows potential investors to compare the FPO's price with the ongoing market price of the company’s shares.

The offering price of FPO shares is usually below market value. This strategy attracts customers to boost sales. Share character is another distinguishing feature. Initial public offerings typically offer common and preferred shares.