Follow On Public Offer (FPO)

A Follow On Public Offer (FPO) is a process by which a publicly traded company issues additional shares to investors after its initial public offering (IPO). This method is leveraged by companies primarily to raise additional capital from the public. The raised funds can be used for various purposes such as clearing debts, expanding businesses, or launching new projects.

Differences Between FPO and IPO

While both IPOs and FPOs involve companies offering their shares to the public, there are some key differences:

Purpose: An IPO introduces a company to the public market with the aim of raising initial capital. FPO, on the other hand, is aimed at raising additional funds once the company is already public.
Risk Level: IPOs are often considered more risky because the company’s performance in the public market is still uncertain. FPOs are generally less risky since the company is already public and has a market history.
Pricing: In an IPO, the price is usually set based on evaluation by underwriters and market conditions. In FPOs, the price is usually market determined and can fluctuate more because the company is already publicly traded.

Types of FPO

There are two primary types of FPOs:

Dilutive Follow-on Offering: In this type, new shares are issued, leading to a dilution of earnings per share (EPS) since the total number of shares increases. This usually results in a decrease in the share price in the short term. The capital raised from such offering is typically used for paying off debt or investing in new ventures.
Non-Dilutive Follow-on Offering: This involves the sale of shares that are already existing. Usually, large shareholders, like directors of the company or other pre-IPO investors, sell their own shares to the public. Since no new shares are issued, there is no dilution of the EPS.

Mechanism of an FPO

The process of an FPO involves several steps:

Board Approval: The company’s board of directors must first approve the FPO.
Regulatory Filing: The company then needs to file required documents with the relevant regulatory authority (like the SEC in the United States).
Pricing: The company must decide on the offering price, often guided by investment bankers.
Marketing: The company typically conducts roadshows and other marketing activities to attract investors.
Book Building: Investment banks help gather investor interest and determine demand for the shares at various price levels.
Allotment: Based on the demand, shares are then allotted to investors.
Listing: The newly issued shares are listed on the stock exchange and become tradable.

Advantages of FPOs

Capital Access: Companies can raise additional capital which can be utilized to pay off debts, invest in new projects, or for general corporate purposes.
Lower Risk: FPOs usually pose lower risk as the company has a track record in the market.
Opportunity for Public Investors: Public investors get another chance to invest in the company, possibly at a different price point than the IPO.

Disadvantages of FPOs

Dilution: For dilutive FPOs, the issuance of new shares dilutes the ownership stake of existing shareholders.
Cost: The process of conducting an FPO involves costs related to underwriting, legal, and administrative expenses.
Price Pressure: The introduction of additional shares can lead to downward pressure on the stock price due to increased supply.

Case Examples

Facebook’s FPO (2013)

One of the well-known examples of an FPO is Facebook’s follow-on offering in December 2013. Facebook issued an additional 70 million shares to the public, raising about $3.9 billion. This allowed the company to ensure more liquidity and use the funds for corporate purposes.

Link: Facebook Investor Relations

Tesla’s FPO (2020)

Another significant example is that of Tesla’s follow-on offering in 2020. Tesla raised $2 billion through this offering by selling 2.65 million shares. The funds raised were primarily for general corporate purposes and strengthening their balance sheet.

Link: Tesla Investor Relations

Conclusion

Follow On Public Offers are a vital tool for publicly traded companies to raise additional funds. They offer an opportunity for companies to access more capital and manage their equity structure efficiently. However, it is crucial to consider the potential dilutive effects and market perception when executing an FPO. Although generally less risky than IPOs, FPOs must be carefully planned and executed to achieve the desired outcomes.