A follow-on offering (FPO) is an issuance of stock shares following a company's initial public offering (IPO). There are two types of follow-on offerings, diluted and non-diluted. A diluted follow-on offering results in the company issuing new shares, which causes the lowering of a company's earnings per share (EPS). During a non-diluted follow-on offering, shares coming into the market already existing and the EPS remains unchanged. Companies offering additional shares must register the FPO offering and provide a prospectus to regulators.
An initial public offering IPO bases its price on the health and performance of the company and the price the company hopes to achieve per share during the initial offering. The pricing of a follow-on offering is market-driven. Since the stock is already publicly traded, investors have a chance to value the company before buying. The price of follow-on shares is usually at a discount to the current, closing market price. Also, FPO buyers need to understand that investment banks directly working on the offering will tend to focus on marketing efforts rather than purely on valuation.
Companies perform follow-on offerings for a wide 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.
A follow-on offering can be either diluted or non-diluted. 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 its shares.
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 typically company founders, board of director members, 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.
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.
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