What is a Follow On Public Offer?
A follow on public offer (FPO) refers to an already listed public company on a stock exchange issuing shares to the public. A follow on public offering allows companies to raise additional capital to expand their business operations, reduce debt, or other purposes. However, the company must already be public through an IPO where it issues shares to the public for the first time. Also, the shares offered through FPO must be available to the general public and not just to the existing shareholders.
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How Follow On Public Offer Works?
The share price during the initial public offering (IPO) is arrived at based on the company’s performance, and the company hopes to achieve the desired price per share during the IPO listing. However, the share price for FPO is market-driven because the share is already trading on the stock exchange. Therefore, this helps the investor understand the company valuation before buying. Also, the price of follow on public shares is usually at a discount price than the current trading price.
The company appears for an FPO for multiple reasons, like the company might need funds to finance its debt or make an acquisition. In some cases, the existing shareholders are interested in offerings to cash out their existing holdings. In others, companies want to raise capital to refinance their debt during low-interest rates. Therefore, investors must be diligent and evaluate the reasons for the company offering before they apply for an FPO.
Types of Follow On Public Offers
There are two types of follow on public offers depending on how the ownership is given to the new shareholders.
The first kind of follow on public offer is diluted FPO, where the company issues more new shares. This increases the number of outstanding shares of the company, and earnings per share reduce. The funds raised during this process are usually used to reduce a company’s debt or change the company’s capital structure.
Non Diluted FPO
Non Diluted FPO is when the existing shareholders of the company sell their shares to the public. The sale proceeds go to the shareholders rather than to the company. Hence there is no monetary loss for the shareholder. Usually, these shareholders are company founders, promotors, board of directors or pre IPO investors.
Since no new shares are issued, and existing shares are offered for sale, the earnings per share remain unchanged. Non-Diluted FPO is also referred to as secondary market offerings. Moreover, this type of FPO does not carry any benefits for the company, and it is used for changing the shareholding ownership pattern.
Why Do Companies Make a Follow On Public Offer?
Generally, companies issue additional shares intending to infuse more capital into the organisation. The following are the various reasons a company may raise capital –
- If the company debts are too high, the company may use its sale proceeds to pay off their existing debt. This helps them to avoid debt covenants that can restrict their business operations.
- A company may issue more shares to increase its outstanding equity shares and rebalance its capital structure, keeping the desired debt to equity ratio.
- When an IPO did not help the company raise the capital needed for their growth plans, they issue more shares through a follow on public offering.
- Lastly, a company prefers to raise capital through issuing shares rather than increasing their debt, which can be helpful to finance new projects, acquisitions or business operations.
Reasons To Invest Through Follow On Public Offer
The following are some of the reasons to invest through FPO –
- Investing in an FPO can benefit the investors more than an IPO because investors have an idea about the company, its management, business practises, etc. Also, investors can refer to the past performance on the stock market, earnings reports, and much more data is available.
- When companies issue shares through FPO, the share prices are slightly lower than those traded on the stock market. This gives an advantage to investors to buy and resell the shares in the secondary market, making a risk free profit.
- Many investors engage in arbitrage trading, where they buy shares at a low price in an FPO and sell at a premium in the market to earn profits.
- The risk is much lower in an FPO than in an IPO.
Therefore, like any other investment, FPO also requires investors to research about the company and its historical performance. However, it is much easier to research and suitable for investors with a good understanding of risk. Furthermore, this gives the investors access to company shares at a discounted price.
Difference Between FPO and IPO
Initial Public Offering is when an unlisted company issues shares for the first time to the public and gets listed on the stock exchange. On the other hand, FPO is a process that happens after an IPO, and the company issues additional shares to the public.
The following are the differences between FPO and IPO.
|Meaning||The shares are issued for the first time to public||Company issues additional shares to public after IPO|
|Nature of shares||The company issues new shares||The company can issue new shares or old shares of the existing shareholders|
|Price band||During the IPO, the band is fixed with slight variations.||The share prices are market driven for FPO. It depends on the number of shares increasing or decreasing.|
|Company share capital||The share capital increases because the company issues fresh capital to the public for the first time.||The share capital can increase during a dilutive FPO, while it remains the same during the non-dilutive FPO|
|Company status||An unlisted company makes an IPO.||An already listed company makes an FPO.|
|Share value||The share price can sometimes be expensive as per the company valuation.||The share price is at a discount because the value of the company is further diluted due to the issue of additional shares.|
|Risk||IPOs are risky because the company appears for the first time.||FPOs are less risky than an IPO because the company shares are already trading in the market. Thus, past performance is already available.|
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