Understanding FPO

A follow-on public offer (FPO) is the issuance of shares to investors by a firm that is publicly traded on a stock exchange. A follow-on offering is an additional share issuance made by a company following an initial public offering (IPO).

Follow-on Public Offer (FPO)?

FPOs should not be confused with IPOs, which are initial public offerings of stock to the general public. FPOs are secondary issues issued after a company is listed on an exchange. The proceeds of the sale go to the company that issued the stock. Companies that want to execute a follow-on public offering, like an IPO, must fill out Securities and Exchange Commission (SEC) documents.

Types:

There are two kinds of public follow-up offers.

• Diluted Subsequent Offering: Diluted follow-on offerings occur when a company issues additional shares to raise funds or expand the business and then sells those shares on the open market. Earnings per share (EPS) decreases as the number of shares increases. The funds raised through an FPO are typically used to reduce debt or change a company's capital structure. The infusion of cash is beneficial to the company's long-term outlook and, thus, to its stock.
• Non-Diluted Subsequent Offering: Non-diluted follow-on offers to occur when holders of existing, privately owned shares bring previously issued shares to the public market for sale. The cash proceeds from non-diluted sales are distributed directly to the shareholders who sold the stock on the open market. In many cases, these shareholders are company founders, board members, or pre-IPO investors. Because no new shares are issued, the company's earnings per share remain unchanged. Secondary market offerings are another term for non-diluted follow-on offerings.

At-the-Market (ATM) Provision:

The ability to raise capital as needed is provided by an at-the-market (ATM) offering. If the company is dissatisfied with the available share price on a given day, it may choose not to offer shares. ATM offerings are frequently referred to as "controlled equity distributions" due to their capacity to sell shares into the secondary trading market at the present existing price.

IPO v/s FPO?

• An IPO occurs when a company is unlisted before its initial public offering. Because the potential investor may not have a track record of the company to analyze before investing, it is a somewhat high-risk investment.
• An FPO is provided when the company is already listed. This allows investors to examine market trends and track their potential investment for a while before making a decision.
• While private companies use IPOs to fund expansion, many government entities use FPOs to cover debts or to reduce their stake in the company.

What Happens in an FPO?

The share price in an FPO is lower than the current market price. The primary goal of issuing shares at a lower price is to attract and retain more subscribers to the issue. Lower demand for the share price, on the other hand, immediately lowers the market price and brings it in line with the FPO issue price.

Why Does a Business Bring Its FPO?

A company can obtain funding in two ways: through debt or by giving out ownership in the business through equity. Similarly, if a publicly traded company requires funding, it can take on debt or issue new shares via an FPO. Here are some of the reasons why the company brings its FPO.

• A company can use a follow-on public offering to raise funds for future expansion plans and projects.
• If a company is overleveraged, it can use the funds raised through an FPO to reduce its debt.

However, the above two requirements will not be met until the company receives the funds raised. This is the case with Diluted FPO. In the case of a Non-diluted FPO, the proceeds are distributed to existing shareholders who are selling their shares.

So, one of the key reasons for having a Non-diluted FPO is when a firm seeks to expand the public shareholding in the company. A higher public shareholding allows for greater public participation, which leads to better share price discovery.

Reasons why Companies use FPOs:

• It is a quick and efficient way to raise capital without going through the lengthy and complex process of issuing new bonds or obtaining a loan.
• FPOs allow the company to increase its market capitalization, which can make it more appealing to investors.
• By issuing more shares, a company's liquidity can be improved, making it easier for shareholders to buy and sell shares as needed.