What Is a Secondary Offering?
A secondary offering is the sale of new or closely held shares by a company that has already made an initial public offering (IPO). There are two types of secondary offerings. A non-dilutive secondary offering is a sale of securities in which one or more major stockholders in a company sell all or a large portion of their holdings. The proceeds from this sale are paid to the stockholders that sell their shares. Meanwhile, a dilutive secondary offering involves creating new shares and offering them for public sale.
- A secondary, or follow-on offering is when a company issues new shares, but after it has already completed its IPO.
- Raising capital to finance debt or making growth acquisitions are some of the reasons that companies undertake secondary offerings.
- Dilutive offerings result in lower earnings per share since the number of shares in circulation increases. Non-dilutive offerings result in an unchanged EPS because they do not involve bringing new shares to the market.
How Secondary Offerings Work
An initial public offering (IPO) is considered a primary offering of shares to the public. Sometimes, a company will decide to raise additional equity capital through the creation and sale of more shares in a secondary offering.
Companies perform secondary offerings for a variety of reasons. In some cases, the company might simply need to raise capital to finance its debt or make acquisitions. In others, the company's investors might be interested in an offering to cash out of their holdings. Some companies may also conduct follow-on offerings in order to raise capital to refinance debt during times of low interest rates. Investors should be cognizant of the reasons that a company has for a follow-on offering before putting their money into it.
There are several major differences between non-dilutive secondary offerings and dilutive secondary offerings. Dilutive secondary offerings are also known as "follow-on offerings" or "subsequent offerings." Dilution occurs when a company issues new stock that results in a decrease of an existing stockholder's ownership percentage of that company, which can negatively impact shareholders' earnings per share (EPS).
Non-Dilutive Secondary Offerings
A non-dilutive secondary offering does not dilute shares held by existing shareholders because no new shares are created. The issuing company might not benefit at all because the shares are offered for sale by private shareholders, such as directors or other insiders (like venture capitalists) looking to diversify their holdings. Usually, the increase in available shares allows more institutions to take non-trivial positions in the issuing company, which may benefit the trading liquidity of the issuing company's shares. This kind of secondary offering is common in the years following an IPO, after the termination of the lock-up period.
Dilutive Secondary Offerings
A dilutive secondary offering, also known as a follow-on offering or subsequent offering, is when a company itself creates and places new shares onto the market, thus diluting existing shares. This type of secondary offering happens when a company's board of directors agrees to increase the share float for the purpose of selling more equity.
When the number of outstanding shares increases, this causes the dilution of per-share earnings. The resulting influx of cash is helpful in achieving the longer-term goals of a company or it can be used to pay off debt or finance expansion. Some shareholders' shorter-term horizons may not view the event as a positive.
A dilutive secondary offering usually results in some sort of drop in stock price due to the dilution of per-share earnings, but markets can have unexpected reactions to secondary offerings. For example, in January 2018, the stock price of CRISPR Therapeutics A.G. saw a one-day increase of 17 percent after the company announced a secondary offering. Although the exact reason for the rapid increase can't be known for sure, analysts suspect it was because investors thought the announcement signaled something greater in the future, perhaps related to the company's plans to use the additional capital to fund further clinical development.
Examples of Secondary Offerings
In 2013, Rocket Fuel announced that it would sell an additional 5 million shares in a follow-on offering. A strong 2013 fourth quarter and a desire to capitalize on its high share price by raising additional funding prompted the move. Rocket Fuel planned to sell 2 million shares, with existing shareholders selling approximately 3 million shares. Additionally, underwriters had an option to purchase 750,000 shares in the follow-on offering.
The deal came in at $34 a share. In the month following the offering, the company's public shares were valued at $44. Those who purchased equity in the follow-on offering realized gains close to 30% in a single month.
Another example of a follow-on offering is that of Alphabet Inc. subsidiary Google (GOOG), which conducted a follow-on offering in 2005. The Mountain View company's initial public offering (IPO) was conducted in 2004 using the Dutch Auction method. It raised approximately $2 billion at a price of $85, the lower end of its estimates. In contrast, the follow-on offering conducted in 2005 raised $4 billion at $295, the company's share price a year later.