Follow-on Public Offer FPO: Definition and How It Works

By adding more shares, stock prices become diluted and there may be a downward trend in share valuation. When a shareholder is not interested in the rights entitlements offer given by the company, he can choose to renounce his rights rather than let it lapse. The renunciation of rights entitlements can happen either by way of rights entitlement trading or off-market transfer.

1. In addition to providing companies with a host of benefits, investing in these equity share issues can also be hugely beneficial for investors.
2. Share buyback or repurchase is the practice where companies decide to purchase their own share from their existing shareholders either through a tender offer or through an open market.
3. Your risk levels need to be extremely high to invest in an IPO because you do not have much idea about the company.
4. They also show how follow-on offerings can be conducted as either dilutive or non-dilutive offerings.

However, company owners may have several reasons for repurchasing their stocks. Individuals should make a point to find out the underlying causes to make the most of such decisions and also to benefit from them accordingly. Your risk levels need to be extremely high to invest in an IPO because you do not have much idea about the company. When it comes to an FPO, you already have an idea about the company, the business, management strategy, financials and all other parameters.

IPO Vs FPO: What is the Difference Between IPO and FPO

As the number of shares increases, the earnings per share (EPS) decreases. The funds raised during an FPO are most frequently allocated to reduce debt or change a company’s capital structure. The infusion of cash is good for the long-term outlook of the company, and thus, it is also good for its shares.

1. Also, shares are separated into diluted and non-diluted shares in a follow-on offering, but shares in an initial public offering are divided into common shares and preferred shares.
2. Rights issue can lower a stock’s value and decrease trading volume, both of which have an impact on the share price.
3. For example, they might use the proceeds to pay off debt and improve their debt-to-value (DTV) ratio, or they can use the funds to improve the company’s growth by financing new projects.
4. Shareholders often react negatively to secondary offerings because they dilute existing shares, and many are introduced below market prices.
5. FPOs are a way for companies to tap into the capital markets and raise additional funds without taking on debt.
6. Andy Smith is a Certified Financial Planner (CFP®), licensed realtor and educator with over 35 years of diverse financial management experience.

It raised approximately $1.67 billion at a price of $85 per share, the lower end of its estimates. In contrast, the follow-on offering conducted in 2005 raised more than $4 billion at $295, the company’s share price a year later. The company listed on the stock exchange is not new, and investors will get the historical reference for its earnings report, the performance of the stock market, and much data to bank on. Public companies can also take advantage of an FPO through an offer document.

Our Companies

Since no new shares are issued in the market, and the shares offered for sale are already existing, the earnings per share remain unchanged. Diluted follow-on offerings happen when a public company issues additional new shares for individuals to invest in. The more shares they issue, the larger the denominator in the earnings per share becomes, which reduces the portion of earnings allocated to existing shareholders. When a company is issuing a follow-on offering, the shares they are giving out must be available to the general public, and it is not just offered to existing shareholders. Additionally, the company must’ve already offered an IPO and be publicly listed on a stock exchange.

What is an Follow-on public offering (FPO)?

Businesses can raise capital quickly without having to announce the offering. ATM offerings are also typically sold for less than traditional follow-on offerings, and they require minimal management involvement. The information mentioned herein above is only for consumption by the client and such material should not be redistributed.

Rights issue frequently result in increased interest in (and trading volume on) those shares, which frequently has a significant impact on trading activity on the day they are announced. If a customer neither apply in rights issue nor renunciate his rights entitlement the same will get laps. Business owners who opt for share repurchase are more likely to enhance their EPS significantly, and that too much faster than operational improvements. Investors scouting for profitable investment options tend to acknowledge companies with steady EPS as a better income-generating avenue with enhanced growth potential.

Hence, the practice of share repurchase not only helps to project a positive image of the company in the market but also comes in handy for potential investors. In dilutive FPO, the company issues an additional number of shares in the market for the public to buy however the value of the company remains the same. A follow on public offer is the issuance of shares after the company is listed on a stock exchange. An FPO can be beneficial for investors as it increases the liquidity of a company’s shares by introducing more shares into the market. This enhanced liquidity makes it easier for investors to buy and sell shares. Additionally, an FPO helps diversify the company’s investor base as new investors participate in purchasing shares.

In dilutive FPO, the company issues additional shares whereas in non-dilutive FPO, promoters sell their shares or stake in the company. Non-diluted follow-on offerings happen when holders of existing, privately-held shares bring previously issued shares to the public market for sale. When a company declares a stock split, the number of shares of that company increases, but the market cap remains the same. Stock split is done to infuse liquidity and to make shares affordable for various investors who could not buy the shares of that company before due to high prices. Companies issue shares to raise equity capital and expand their venture, but often such a practice does not prove to be of much use. Similarly, keeping excess money at the bank is more like a truncated cash flow offering liquidity over the ideal requirement.

As with an IPO, the investment banks who are serving as underwriters of the follow-on offering will often be offered the use of a greenshoe or over-allotment option by the selling company. This technique does not increase the number of shares what is follow on public offer for the company, just the number of shares available for the public increases. Unlike dilutive FPO, since this method is not doing anything to the number of shares of the company, it does not do anything to the company’s EPS.

Financial statements

Hence, instead of piling on cash reserves, companies with robust financial standing tend to make the best possible use of the cash available through a stock buyback. Share buyback or repurchase is the practice where companies decide to purchase their own share from their existing shareholders either through a tender offer or through an open market. In such a situation, the price of concerning shares is higher than the prevailing market price. However, an FPO is used by a company only to reduce the debt or to raise additional capital of the company.