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

A follow-on public offering (FPO) is a type of secondary public offering that helps a company raise more money. In a follow-on public offering, the company's current stockholders can buy more shares of the company through the offering.  

Types of Follow-On Public Offering 

When a company sells new shares after its initial public offering (IPO), it is said to have conducted a follow-on public offering. There are two kinds of follow-on public offering ― the diluted type, and the undiluted type. In the diluted follow-on public offering, the company issues more number of shares, which lowers its earnings per share (EPS). 

In the non-diluted follow-on public offering, no new shares are offered; the shares offered to the public come from the promoters. As a result, the EPS stays the same. 

When a company wishes to sell more shares, it has to register the FPO with the regulators and provide them a prospectus. 

Use of funds mopped up from Follow-On Public Offerings 

Most of the time, the money raised through a follow-on public offering (the diluted type) is used to pay off debt or change a company's capital structure. The cash infusion is good for the company's long-term working, and hence, for its shares. This is also known as a primary market offering 

In the undiluted type, the cash from the share-sale goes straight to the selling shareholders. Though the EPS does not get adversely affected, the company doesn’t gain in any other way from this sale of shares. Such a follow-on public offering that does not dilute the stock price is also known as secondary market offering. 

Why do Companies go for Follow-On Public Offerings? 

A public company usually sells new shares to get more money into the business. A company may want to raise more equity for several reasons. These include:  

• If the company has huge debt on its books, the proceeds from the follow-on public offering can be used to reduce or eliminate the debt. Having to service huge debt can make it hard to run a business. With the help of the proceeds from the follow-on public offering, the company can keep the debt-to-equity ratio at a healthy level. The company can rebalance its capital structure and increase its equity by issuing additional shares.  

• The company would rather sell shares to raise money for expansion and other purposes than take on more debt and pay more interest.  

Examples of Follow-On Public Offerings 

In 2005, Google sold 14,159,265 shares of Class A common stock for $295 each. In 2013, Facebook said it would sell 27,004,761 more shares. Existing shareholders were also selling 42,995,239 shares, including 41,350,000 shares from the company's CEO, Mark Zuckerberg. They planned to use the money from selling shares to pay for business operations. After its initial public offering, Tesla gave out new shares more than once. In 2011, it sold 5,300,000 new shares of common stock. In 2012, it sold 4,344,930 new shares of common stock. At the start of 2020, the company said it would sell stock worth $2 billion. They said it would sell another $5 billion worth of stock in December 2020. 

Follow-On Public Offering vs. Initial Public Offering 

In the case of a follow-on public offering, the market sets the price of the share. This is different from an initial public offering, in which the company sets the price of the share. Since the company is already publicly listed, investors can compare its market value to the price at which it was sold earlier.  

Most of the time, shares in a follow-on public offering are price lower to the current market share price (CMP) of the share. This is to give people a reason to buy the shares being offered. 

In a follow-on public offering, shares could be diluted shares and non-diluted shares. In an initial public offering, shares could be common and preferred. 

Conclusion 

If the company you have invested in has announced a new offering, you should pay attention. Follow on public offerings frequently dilute existing share values, which means that for each share you own, you will receive a reduced percentage of the entire firm or its profit. This occurs when a company raises capital through an offering of new shares. In the future, if and when the company decides to pay dividends to its shareholders, those payments will be smaller. 

FAQs:  

Q. What is the difference between primary and secondary follow-on public offering?  

When a company sells new shares directly to shareholders, it is terming a primary follow-on offering. However, when existing stockholders sell their shares to the public, it is terming a secondary follow-on public offering. A primary offering lowers the value of the stock, while a secondary offering doesn't do that. 

Q. What's the difference between an initial public offering and a follow-on public offering? 

When a private company goes public and lists its shares on a stock exchange for the first time it is done through a process known as initial public offering (IPO). The term "follow-on public offering" refers to the process by which a company that has already gone public (via an IPO) sells additional shares to the public to raise additional capital. 

Q. What is a "follow-on" loan? 

Follow-on financing is when a company that has already raised money does another round of funding raising. This is seen in the start-up space before the company goes public.