Follow-On Offering

What is a 'Follow-On Offering'

A follow-on offering is an issue of stock that comes after a company has already issued an initial public offering (IPO). A follow-on offering can be diluted, meaning that the new shares lower a company's earnings per share (EPS), or undiluted, if the additional shares are preferred. A company looking to offer additional shares registers the offering with regulators, which includes a prospectus of the investment.

BREAKING DOWN 'Follow-On Offering'

Unlike an IPO, which includes a price range that the company is looking to sell its shares, the price of a follow-on offering is market-driven. The company is already publicly traded, and it has been consistently valued by investors for at least a year prior to the follow-on offering. Any investment bank working on the offering tends to focus on marketing efforts rather than valuation. The price of a follow-on offering is usually offered at a small discount from the closing market price on the day of the transaction.

Two Types of Follow-On Offerings

A follow-on offering can be either dilutive or non-dilutive. A dilutive follow-on offering occurs when a company wants to raise additional funding in the public market. When this happens, the company issues more shares, but the value of the company remains the same, effectively increasing the size of the pie and therefore decreasing the per-share earnings. The money raised from a dilutive follow-on offering is usually allocated to pay down debt and change a company's capital structure.

A non-dilutive follow-on offering arises when existing shares that are held privately, usually by company founders, board of directors or pre-IPO investors, are subsequently sold on the open market. The cash proceeds go directly to the shareholder selling the shares and not to the company itself. Since no new shares are issued, the company's EPS remains unchanged.

An Example of a Follow-On Offering

Rocket Fuel, for example, in 2013, announced plans that it would sell an additional 5 million shares in a follow-on offering. This offering came in response to a strong fourth quarter in 2013, and the company wanted to capitalize on its high share price by raising additional funding. The company itself decided to sell 2 million shares, with existing shareholders selling roughly 3 million shares. Underwriters were also given the option to purchase 750,000 shares in the follow-on offering.

The deal was priced at $34 a share. After a month of the offering, the company's public shares were valued at $44. Those who purchased equity in the follow-on offering had gains close to 30% in a single month.