Navigating Follow-on Public Offers (FPOs): Strategies, Benefits, and Pitfalls


Discover the ins and outs of Follow-on Public Offers (FPOs) in the financial world. This comprehensive guide covers types of FPOs, their benefits, drawbacks, and real-world examples, providing you with a deep understanding of this crucial financial mechanism.

Unlocking the world of follow-on public offers (FPOs)

Follow-on Public Offers (FPOs), also known as secondary offerings, are a pivotal component of the financial landscape. They enable publicly-listed companies to raise additional capital by issuing and selling new shares to investors after their initial public offering (IPO). This article delves into the intricacies of FPOs, shedding light on their various facets, benefits, and potential drawbacks.

Understanding follow-on public offers (FPOs)

Follow-on Public Offers (FPOs) are a strategic financial maneuver used by publicly-listed companies to increase their equity capital. Unlike an IPO, which is the initial sale of company shares to the public, FPOs occur after a company is already listed on a stock exchange. These offerings serve as a means to raise additional funds for various purposes, such as reducing debt, financing growth, or undertaking new projects.

Weigh the risks and benefits

Here is a list of the benefits and drawbacks associated with Follow-on Public Offers (FPOs):

  • Capital injection: FPOs provide a means for companies to inject additional capital into their operations, which can be used for various purposes, including expansion and debt reduction.
  • Debt reduction: Many companies choose FPOs to reduce outstanding debt, which can improve their financial health and creditworthiness.
  • Flexible offerings: At-the-market (ATM) offerings offer flexibility, allowing companies to adjust the size and price of their FPOs based on market conditions.
  • Share dilution: In diluted FPOs, existing shareholders may experience dilution of their ownership, potentially leading to a decrease in earnings per share (EPS).
  • Market reaction: Announcements of FPOs can trigger market reactions, causing a drop in the company’s share price as shareholders react to potential dilution and lower offering prices.

Types of follow-on public offers (FPOs)

Diluted follow-on offering

Diluted FPOs involve the issuance of new shares to the public market with the aim of raising capital. While this type of offering provides much-needed funds to the company, it comes at the cost of diluting existing shareholders’ ownership. As the number of shares in circulation increases, the earnings per share (EPS) typically decrease. Companies often allocate the funds raised during a diluted FPO to reduce debt or enhance their capital structure, which can ultimately benefit long-term growth.

Non-diluted follow-on offering

Non-diluted FPOs, on the other hand, do not introduce new shares into the market. Instead, they involve the sale of existing privately-held shares by major shareholders, such as company founders, board members, or pre-IPO investors. The proceeds from these sales go directly to the selling shareholders and do not impact the company’s EPS since no new shares are issued. Non-diluted FPOs are often referred to as secondary market offerings.

At-the-market (ATM) offering

ATM offerings offer a unique level of flexibility for companies seeking to raise capital through FPOs. In an ATM offering, a company can sell secondary public shares on any given day, adjusting the offering size and price based on prevailing market conditions. This approach allows companies to make strategic decisions about when and how to issue shares, optimizing their capital-raising efforts while minimizing market impact.

Real-world example of a follow-on public offer (FPO)

Real-world examples can help illustrate the impact of FPOs. In 2015, shortly after going public, Shake Shack (SHAK) announced a substantial secondary offering. The news of this FPO resulted in a 16% drop in the company’s share price, as investors reacted to the dilution of their ownership. The offering price was below the existing market price, contributing to the negative market response.

Despite these initial challenges, FPOs remain a common financial strategy for companies looking to raise additional capital.

The bottom line

Follow-on Public Offers (FPOs) play a vital role in the financial strategies of publicly-listed companies. These offerings provide a means to raise additional capital for various purposes, from debt reduction to fueling growth. While FPOs can lead to share dilution and market reactions, they remain a valuable tool for companies seeking to optimize their financial positions and drive long-term success.

Frequently asked questions

What is the purpose of an FPO?

FPOs serve the purpose of allowing publicly-listed companies to raise additional capital after their IPO. This capital can be used for various purposes, including debt reduction, funding growth, or initiating new projects.

Do FPOs impact existing shareholders?

Yes, FPOs can impact existing shareholders, especially in diluted FPOs. The introduction of new shares can dilute existing ownership and potentially lead to a decrease in earnings per share (EPS).

How do ATM offerings differ from traditional FPOs?

ATM offerings provide companies with flexibility in selling secondary public shares based on prevailing market conditions. Unlike traditional FPOs, which have fixed offering sizes and prices, ATM offerings allow companies to adjust these factors as needed.

Why do companies choose non-diluted FPOs?

Companies may opt for non-diluted FPOs when major shareholders, such as founders or board members, sell their privately-held shares to the public. In these cases, the proceeds go to the selling shareholders, and the company’s EPS remains unaffected.

Key takeaways

  • FPOs, or Follow-on Public Offers, allow established publicly-traded companies to issue more shares after their IPO to raise additional capital.
  • There are two main types of FPOs: dilutive, where new shares are added, and non-dilutive, where existing private shares are sold publicly.
  • An at-the-market (ATM) offering is a flexible FPO option, allowing companies to sell secondary public shares based on market conditions.
View Article Sources
  1. follow-on offering – Cornell Law School
  2. public offering – Cornell Law School
  3. What pathways are available to raise capital from investors? – U.S. Securities and Exchange Commission
  4. Pre IPO investing: here’s how it works – SuperMoney
  5. Unlocking IPO lock-up periods: what you need to know – SuperMoney