A Follow-on Public Offering (FPO) is when a publicly listed company issues additional shares to the public. This differs from an Initial Public Offering (IPO), where a company first goes public. An FPO can involve the issuance of new shares or an offer for sale of existing shares by existing shareholders. Companies use FPOs to raise capital for various purposes, such as expansion, debt reduction, or acquisitions. The company must meet ongoing listing requirements to conduct an FPO.
Reasons for FPOs
Companies pursue FPOs for several reasons. Primarily, it’s a way to raise substantial capital from the market. This capital can be used to fund growth initiatives, pay down debt, or acquire other businesses. FPOs can also increase the company’s public float, potentially leading to greater liquidity and visibility in the market. Sometimes, existing large shareholders may use an FPO to reduce their holdings.
Impact on Shareholders
Existing shareholders often react negatively to FPOs due to the potential dilution of their ownership. When new shares are issued, each existing share represents a smaller percentage of the company’s total ownership. This can lead to a decrease in earnings per share and potentially a drop in the stock price. However, if the FPO raises funds that are used for profitable growth, the long-term impact on shareholders can be positive.
Benefits of FPOs
While existing shareholders might experience short-term dilution, FPOs can benefit the company significantly. They offer a relatively quick and efficient way to raise capital compared to other methods like debt financing. For investment banks, FPOs generate fees from underwriting and managing the offering.
Types of FPOs
There are different types of FPOs. A “dilutive” FPO involves the issuance of new shares, which dilutes existing shareholders’ ownership. A “non-dilutive” FPO, also known as an Offer for Sale (OFS), involves current shareholders selling their shares, which doesn’t create new shares or dilute existing ownership.
Conclusion
FPOs are a common method for listed companies to raise additional capital. While they can lead to short-term share price fluctuations and dilution for existing shareholders, they can also fuel growth and expansion, ultimately benefiting the company and its investors in the long run. Understanding the reasons behind an FPO and its potential impact is crucial for investors to make informed decisions.
