What Is a Follow-On Public Offer (FPO), and How Does It Work?

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

A follow-on public offering (FPO) is the issuance of shares to investors by a company listed on a stock exchange. A follow-on offering is an issuance of additional shares made by a company after an initial public offering (IPO). Follow-on offerings are also known as secondary offerings.

Key Takeaways

  • A follow-on public offer (FPO), also known as a secondary offering, is the additional issuance of shares after the initial public offering (IPO). 
  • Companies usually announce FPOs to raise equity or reduce debt.
  • The two main types of FPOs are dilutive—meaning new shares are added—and non-dilutive—meaning existing private shares are sold publicly.
  • An at-the-market offering (ATM) is a type of FPO by which a company can offer secondary public shares on any given day, usually depending on the prevailing market price, to raise capital.

How a Follow-on Public Offer (FPO) Works

Public companies can also take advantage of an FPO through an offer document. FPOs should not be confused with IPOs, the initial public offering of equity to the public. FPOs are additional issues made after a company is established on an exchange. Proceeds from the sale go to the company issuing the stock. Similar to an IPO, companies who want to execute a follow-on public offer must fill out SEC documents.

Types of Follow-on Public Offers

There are two main types of follow-on public offers. The first is dilutive to investors, as the company’s board of directors agrees to increase the share float level or the number of shares available. This kind of follow-on public offering seeks to raise money to reduce debt or expand the business, resulting in an increase in the number of shares outstanding.

The other type of follow-on public offer is non-dilutive. This approach is useful when directors or substantial shareholders sell off privately held shares.

Diluted Follow-on Offering

Diluted follow-on offerings happen when a company issues additional shares to raise funding and offer those shares to the public market. As the number of shares increase, the earnings per share (EPS) decrease. 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.

Non-Diluted Follow-on Offering

Non-diluted follow-on offerings happen when holders of existing, privately-held shares bring previously issued shares to the public market for sale. Cash proceeds from non-diluted sales go directly to the shareholders placing the stock into the open market.

In many cases, these shareholders are company founders, members of the board of directors, or pre-IPO investors. Since no new shares are issued, the company's EPS remains unchanged. Non-diluted follow-on offerings are also called secondary market offerings.

At-the-Market Offering (ATM)

An at-the-market (ATM) offering gives the issuing company the ability to raise capital as needed. If the company is not satisfied with the available price of shares on a given day, it can refrain from offering shares. ATM offerings are sometimes referred to as controlled equity distributions because of their ability to sell shares into the secondary trading market at the current prevailing price.

Example of a Follow-on Offering

Follow-on offerings are common in the investment world. They provide an easy way for companies to raise equity that can be used for common purposes. Companies announcing secondary offerings may see their share price fall as a result. Shareholders often react negatively to secondary offerings because they dilute existing shares and many are introduced below market prices.

In 2015, many companies had follow-on offerings after going public less than a year prior. Shake Shack was one company that saw shares fall after news of a secondary offering. Shares fell 16% on news of a substantial secondary offering that came in below the existing share price.

In 2017, follow-on offerings produced $142.3 billion in equity raised for companies. There were a total of 737 FPOs in 2017. This marked a 21% jump in the number of FPOs versus 2016. However, the value of FPOs was down 3% year-over-year in 2017.

What Are the Benefits of Follow-On Offerings?

There are several reasons why a public company will choose to raise more equity. For example, they might use the proceeds to pay off debt and improve their debt-to-value ratio, or they can use the funds to improve the company's growth by financing new projects.

What Are the Advantages of ATM Offerings?

At-the-market offerings have several advantages, including minimal market impact. Businesses can raise capital quickly without having to announce the offering. ATMs are also typically sold for less than traditional follow-on offerings, and they require minimal management involvement.

What Are the Disadvantages of ATM Offerings?

ATM offerings tend to be smaller than traditional follow-on offerings, so if a business is looking to raise a large amount of capital, this may not be the way. In addition, the price may fluctuate depending on the market.

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