After a firm has completed its initial public offering (IPO), it may later decide to sell more stock in what is known as a follow-on offering. There are two distinct kinds of follow-on offerings: those that are diluted and those that are not diluted. When a corporation issues additional shares following an initial public offering (IPO), this is known as a diluted follow-on offering, leading to a decrease in the firm's profits per share (EPS).

In the event of a follow-on offering that is non-diluted, the shares being distributed into the market are those that already exist, and the EPS does not change. A corporation must register the FPO offering and furnish regulators with a prospectus if there is an intention to offer new shares in the company.

The Process Behind a Follow-on Offering, Also Known as an FPO

The price of a share in an initial public offering (IPO) is determined by the overall health and performance of the business, as well as the price that the firm expects to obtain for each share during the first sale. The market determines the price of a follow-on product or service. Investors already have the opportunity to evaluate the firm before buying a purchase decision since the stock is traded openly.

In most cases, the price of follow-on shares will be lower than the current market price when it closes for the day. In addition, purchasers of FPOs need to be aware that investment banks actively involved in the offering tend to concentrate more on marketing activities than just on valuation.

Many different motivations might drive businesses to launch subsequent product lines or services. The only thing the firm has to do to pay off its debt or make acquisitions may be to raise capital, but that's not always the case. In other situations, the firm's shareholders can be interested in an offering to sell some or all of their ownership to get cash. When interest rates are historically low, it may be beneficial for certain businesses to obtain capital via follow-on offerings to refinance existing debt. Before placing their money into a follow-on offering, investors should know the factors behind a company's decision.

Types of Follow-on Public Offers

There are primarily two kinds of public offers known as follow-on offers. The first scenario is bad for investors since the Board of Directors of the firm votes to raise the share float level, which means there will be more shares available for purchase. In the case of a follow-on public offering, the goal is to raise capital so that the company may either decrease its debt or expand its operations; this will increase the total number of shares that are now outstanding. The non-dilutive sort of follow-on public offer is the other variant. This strategy is helpful in situations in which large shareholders or directors are selling off privately owned shares.

Diluted Follow-on Offering

When a corporation issues extra shares to obtain capital and then offers those shares on the public market, the company has just completed a diluted follow-on offering. The earnings per share (EPS) will drop to the extent that more shares are outstanding. Most of the time, the monies generated via an FPO are used toward paying down existing debt or altering the firm's capital structure. The injection of cash is beneficial for the firm's long-term prospects, and as a result, it is also beneficial for the shares of the company.

Non-Diluted Follow-on Offering

Follow-on offers that do not dilute current shareholders' ownership stakes occur when existing shareholders sell some of their shares on the public market using previously issued stock. The shareholders who place the shares on the open market are entitled to receive the cash proceeds from any non-diluted sales of the stock. These shareholders are often the company's founders, members of the board of directors, or investors who participated in the pre-IPO round. The corporation does not issue new shares; hence the earnings per share figure do not change. "Secondary market offers" may also refer to "non-diluted follow-on offerings."

At-the-Market Offering

The issuing firm has the flexibility to obtain capital whenever it may be required by using an offering that is conducted at the market. It is within the company's right to withhold the sale of shares on any particular day if it feels that the market price of shares does not meet its expectations. Because of their capacity to sell shares into the secondary trading market at the current existing price, ATM offers are frequently referred to as controlled equity distributions. This is because of the ability of ATM offerings to sell shares.