Definition
FPO stands for Follow-On Public Offering. It refers to the process of issuing new shares by a publicly listed company. These shares are offered to the public for subscription in order to raise additional capital. FPOs are often used by companies to expand their operations, fund research and development, pay off debt, or make acquisitions.
Overview
A secondary offering, commonly referred to as a follow-on public offer (FPO), is the subsequent issuance of shares following the initial public offering (IPO).FPOs are typically announced by businesses to raise additional capital. The two primary FPO types are non-dilutive, in which existing private shares (shares of the promoters) are sold to the public, and dilutive, in which additional shares are added.
A corporation can raise cash through an at-the-market offering (ATM), a sort of FPO, by offering secondary public shares on any given day, typically based on the current market price.
Types of FPOs
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Dilutive
When a business issues additional shares to raise cash and subsequently sells those shares on the open market, this is known as a diluted follow-on offering. The earnings per share (EPS) declines as the number of shares rises. Debt reduction and capital structure changes are the two most prevalent uses of funds raised through an FPO. The financial infusion enhances the company's long-term prospects while boosting its stock price.
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Non-dilutive
Holders of current, privately held shares may resell previously issued shares on the open market in a non-diluted follow-on offering. When stock is sold without diluting, the cash proceeds go to the stockholders who sold their shares on the open market. Since no new shares are issued, the company’s EPS remains unchanged. Non-dilutive follow-on offerings are also called secondary market offerings.
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Market-Priced Offering (ATM)
The issuing corporation can raise money as needed by employing an at-the-market (ATM) offering. If the corporation is unhappy with the price at which shares can be bought on a specific day, it may decide not to offer shares. ATM offerings are frequently referred to as "managed equity distributions" because they can sell shares into the secondary trading market at the current prevailing rate.
What Advantages Do Follow-On Offerings Offer?
Follow-on offerings offer several advantages over other forms of equity financing. First, they provide a way for companies to raise additional capital without incurring the high costs associated with an IPO. Second, they provide a more liquid and transparent market for investors, which can increase demand for the company's shares.
Follow-on offerings can also help companies to diversify their investor base, which can reduce their reliance on a small number of large investors. This can help to reduce the risk of a sudden drop in share prices if one or more large investors decide to sell their shares.
What Benefits Do ATM Offerings Offer?
ATM offerings offer several benefits over traditional FPOs. First, they provide a more flexible way to raise capital, allowing companies to sell shares gradually over time. This can help to reduce the risk of sudden drops in share prices that can occur with traditional FPOs.
ATM offerings also provide a cost-effective way to raise capital, as companies can avoid the high fees associated with traditional FPOs. Finally, ATM offerings provide a way for companies to take advantage of market fluctuations by selling shares when prices are high and holding off when prices are low.
Key takeaways
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When a company issues additional shares of its stock after its initial public offering (IPO), this is called a follow-on public offer (FPO) or a secondary offering.
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Companies typically announce FPOs to raise more equity or to pay off their debts. There are two types of FPOs: dilutive, which involves adding new shares, and non-dilutive, which involves selling existing private shares to the public.
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An at-the-market (ATM) offering is a specific type of FPO where a company can sell secondary public shares at any time based on the current market price, in order to raise funds.