A Follow-On Public Offering (FPO), also known as a secondary offering, is a company’s issuance of additional shares to investors after its initial public offering (IPO). The main objectives of an FPO can vary but generally include raising more capital for the company or allowing existing shareholders, such as founders or early investors, to liquidate part of their holdings.
Types of Follow-On Public Offerings
Dilutive FPO
A dilutive FPO occurs when a company issues new shares to raise additional capital. This increases the total number of outstanding shares, which usually dilutes the earnings per share (EPS).
Non-Dilutive FPO
In a non-dilutive FPO, no new shares are issued. Instead, existing shareholders sell their stakes in the company. This does not alter the total number of shares outstanding and does not dilute the EPS.
Purpose of an FPO
Raising Additional Capital
One of the primary reasons for an FPO is to raise additional capital. This can be used for various purposes such as funding new projects, reducing debt, or expanding operations.
Liquidity for Existing Shareholders
An FPO can provide liquidity to existing shareholders, allowing them to sell a portion of their shares in the market.
Considerations and Risks
Market Conditions
The success of an FPO can be influenced by prevailing market conditions. Poor market conditions can lead to lower demand for the additional shares, affecting the share price.
Dilution of Shares
In a dilutive FPO, the issuance of additional shares can dilute the ownership percentage of existing shareholders, potentially impacting the share price negatively.
Examples of Follow-On Public Offerings
Tesla Inc. FPO
In February 2020, Tesla Inc. completed an FPO to issue 2.65 million additional shares, raising approximately $2 billion. The proceeds were intended for general corporate purposes and to further strengthen its balance sheet.
Zoom Video Communications Inc. FPO
Zoom Video Communications raised $1.75 billion through an FPO in January 2021, by issuing 5.1 million shares. The funding aimed at taking advantage of the increased demand for its services.
Historical Context
The concept of an FPO became more prevalent in financial markets as companies sought additional ways to raise capital post-IPO. It became a popular mechanism for companies looking to leverage market conditions or investor interest to secure more funds without having to resort to more debt.
Comparisons to Related Terms
Initial Public Offering (IPO)
An IPO is the first sale of shares by a company to the public. While an IPO sets the initial market price and establishes the company’s stock on exchanges, an FPO comes after the IPO and aims to raise additional funds or provide liquidity to existing shareholders.
Rights Issue
A rights issue offers existing shareholders the right to buy additional shares at a discount, typically before they are offered to the general public. Unlike an FPO, which is open to all investors, a rights issue focuses on existing shareholders.
FAQs
What is the difference between an FPO and a secondary offering?
How does an FPO affect existing shareholders?
References
- “Understanding Follow-On Public Offerings,” Investopedia. https://www.investopedia.com/terms/f/followon-public-offering.asp.
- “Tesla, Inc.: Recent News,” Tesla Motors. https://ir.tesla.com/.
- “Zoom Video Communications Raises $1.75 Billion,” Zoom Investor Relations. https://investors.zoom.us/.
Summary
Follow-On Public Offerings (FPOs) are critical financial tools for publicly traded companies to raise additional capital or provide liquidity to existing shareholders. They come in two primary forms: dilutive and non-dilutive. The success of an FPO is often influenced by market conditions and careful consideration must be given to the potential dilution of existing shares. With a comprehensive understanding of FPOs, investors and companies can better navigate their strategic financial initiatives and investment decisions.
