What is Follow-On Public Offer (FPO)?

Published by Thomas Herold in Corporate Finance, Investments, Trading

'Follow-On Public Offer (FPO)' is explained in detail and with examples in the Trading edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

A Follow-On Public Offer is also known by its official acronym FPO. This occurs when a public company which is already listed on a stock market exchange issues additional shares to investors. Such FPOs are useful and practical for those firms which wish to raise extra equity capital from the capital markets via stock issues. These methods are popular with publically traded corporations.

Such firms like to avail themselves of these FPO issues by selling more shares to investors. They have to complete an offer document in order to accomplish this. FPOs are never to be confused with IPOs. IPOs refer to the initial public offering a company uses to issue equity shares to the public for the very first time. FPOs are instead supplementary issues which they make once the firm is already exchange-established and -trading.

There are two main types of Follow-on public offerings available to companies today. The first kind dilutes existing investors. The Board of Directors must agree to boost the level of shares floating. It raises money for paying down debt or internally growing the company business. It ultimately raises the numbers of outstanding shares as well.

The second kind of FPO proves to be non diluting. It is the preferred method when the major shareholders or corporate directors elect to sell their own personal shares of the company stock. Since no new shares become created, it does not dilute the holdings of existing investors in the company. This is generally known as a secondary market offering. Neither the firm nor the present shareholders gain an advantage from this type of method.

Because there are two different means of selling shares with such Follow-On Public Offers, this makes it extremely crucial to know who the stock sellers are on any given offering transaction. This way, investors are able to learn quickly and easily if the new offering will prove to be net dilutive or not.

Such Follow-On Public Offerings prove to be increasingly commonplace within the world of investing. Corporations appreciate that they can quickly and easily collect additional fresh capital to utilize for any common purpose they deem appropriate or expedient. Their share price might drop as a result of such an FPO announcement. This upsets shareholders who are the main losers in such a scenario. Many times these secondary share offerings will be made at prices that are lower than the present market prices. In any case, they will almost certainly dilute the power and voting rights of their presently existing shares of company stock.

It always helps to look at some tangible examples to better grasp a challenging concept such as this one. Back in the year 2013, corporations deployed enough Follow-On Public Offers to raise an impressive $201.7 billion in additional equity. This was the greatest single-year amount that they raised for four years. Facebook outperformed in this respect by selling off an additional $3.9 billion worth of shares. This made them among the biggest single beneficiaries of the FPOs for that year.

Investment banks love secondary offerings. They benefit directly from them since they receive a portion of the fee structure pricing. In that same year of 2013, leading American investment banking operation Goldman Sachs handled $24.7 billion in secondary offerings to be the number one FPO underwriter.

The year 2015 subsequently saw a great number of firms which had only gone public a year earlier decide to issue Follow-On Public Offerings. Shake Shack proved to be one of these. They announced their secondary offering and witnessed their shares decline as a result. The stock plunged an eye-watering 16 percent on the news that a major secondary offering was in the works for a price lower than the then-current share price. Naturally, investors in Shake Shack were unhappy, but they were completely powerless to prevent the deal from going through.

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The term 'Follow-On Public Offer (FPO)' is included in the Trading edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.