Follow-On Offering
Candlefocus EditorUnlike an Initial Public Offering (IPO), prices associated with a Follow-On Offering (FPO) are not as heavily influenced by industry trends or investor sentiment since the company’s shares have already been issued and traded. This stability in pricing gives the company more control over the pricing of the newly issued shares.
A common method of calculating pricing for a Follow-On Offering (FPO) is the use of a Discounted Cash Flow (DCF) model. This model takes into account factors such as projected future cash flows, estimated growth, risks, and the cost of equity. Once these factors are taken into account, a discount rate is applied and applied to calculate the current discounted value of the company's future cash flows.
One of two types of offering can be undertaken when it comes to a Follow-On Offering (FPO): diluted or non-diluted. A diluted offering increases the number of shares in the company in circulation, which in turn lowers the Earnings Per Share (EPS). Conversely, a non-diluted offering does not result in a change to the Earnings Per Share (EPS) as with this type of offering only existing shares are dispersed on the market.
Examples of a Follow-On Offering (FPO) can be seen by looking at the social media giant Facebook in 2012 and the pharmaceutical giant Biogen in 2018. Both of these companies raised additional funds through the issuance of additional shares in order to become more financially stable and acquire growth.
Follow-On Offerings (FPOs) witness the entry of new public shareholders into the market, as well as creating opportunities for existing shareholders to sell some of their shares on the market. However, it should be noted that any new issuance of shares will make it more difficult for shareholders to make a return as it reduces their proportional ownership of the company.
In conclusion, a Follow-On Offering (FPO) is an important means of raising capital for publicly traded companies after their Initial Public Offering (IPO). Companies undertake this type of offering for a variety of different reasons, from reducing debt to acquiring growth. Diluted and non-diluted follow-on offerings (FPOs) exist, each with its own pros and cons, and these offerings witness the entry of new public shareholders as well as giving existing shareholders the chance to sell some of their shares on the market.