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What is a Follow On Offering?
What’s important to know about it?
In this article, I will break down the meaning of a Follow On Offering so you know all there is to know about it!
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What Is A Follow On Offering
A follow on offering is a term used in finance to refer to a company issuing additional shares following an initial public offering.
In other words, a company that issues additional shares of stock following its initial public offering is said to make a follow on offering.
When there’s a follow on offering, the additional shares of stock issued can either be considered as “diluted” or “non-diluted”.
The diluted follow on offering is when the additional shares will lead to a reduction of the company’s earnings-per-share whereas the non-diluted does not impact the earnings-per-share.
Just like with the issuance of the shares in the context of an initial public offering, the issuer will need to register the additional offering with the securities regulators and provide investors with a prospectus.
The main objective of a follow on offering is to raise additional capital so a company can fund a business project, pay off debt, or finance its business operations.
Keep reading as I will further break down the meaning of a follow on offering and tell you how it works.
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How Does A Follow On Offering Work
A follow on offering is when a company issues shares to the public following an initial public offering (IPO).
Generally, a company will work with investment bankers to set the price for the sale of their shares to the public when going public.
As such, the share price in the context of an IPO is determined by the investment bankers based on their assessment of what the market will be ready to pay for the shares.
Once the IPO is completed, the company’s shares start trading in the market and will be priced based on what the market considers they are worth.
If the company chooses to issue additional shares in a follow on offering, the shares will be offered at a price slightly below the market price.
So if the stock price has gone up since the IPO, the company may be able to raise more capital by issuing shares that are worth more.
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Why Do Companies Issue Follow On Shares
There are many reasons why companies will consider issuing additional shares following an IPO.
Fundamentally, the company’s objective is to raise capital for its business.
A company may find out that its shares are appreciating in value and can raise additional capital by selling its shares at a higher price per share.
Another company may issue shares to pay off debt, refinance its debt, acquire another company, fund a new project, inject additional funds in its working capital, or invest back into the business for any number of reasons.
Investors should carefully evaluate a company’s objective in issuing additional shares.
If a company is issuing additional shares to fund a major lawsuit or to mitigate certain liabilities, investors should assess the purchase of the shares in light of the context.
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Types of Follow On Offerings
In essence, there are two types of follow on offerings: diluted and non-diluted.
A dilutive follow on offering is a type of offering where the additional shares that are issued by the company will increase the total number of shares outstanding and reduce the company’s earnings-per-share (EPS).
Since the company’s earnings will be divided by a larger number of shares outstanding, the earnings-per-share will go down.
Another type of offering is the non-dilutive follow on offering where the additional shares issued do not result in an increase in the company’s total outstanding shares and do not impact its EPS.
No matter the dilutive or non-dilutive impact of the offering, companies will consider issuing shares to change their capital structure, reduce their debt exposure, and inject the capital needed to adequately fund the company’s growth.
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Follow On Offering Meaning FAQ
Why do companies issue a follow on offering?
There are many reasons why companies issue follow on offerings.
Here are the main reasons why follow on offerings are considered by public companies:
- Use the proceeds of the sale to pay off debt
- Use the proceeds to refinance debt
- Raise equity capital to avoid violating debt covenants
- Change its capital structure
- They could not raise enough capital through their prior offerings
- The company chooses to finance business projects in equity
What are examples of follow on offerings?
The most notable follow on offering that we can cite as an example is that of Google.
In 2004, Google went public using a Dutch Auction method allowing it to raise $1.67 billion by issuing shares at $85 per share.
The following year, it sold 14,159,265 Class A stock at a price of $295 allowing it to raise more than $4.1 billion in capital.
How are follow on shares priced?
Follow on shares are priced based on the market value of the shares.
Since the company’s shares are already trading on the stock exchange, the market has had the time to properly evaluate the company’s stocks.
This is different from an IPO where the price is set by the company with the help of the investment bankers based on what they estimate the shares to be worth.
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So there you have it folks!
What does a follow on offering mean?
In a nutshell, a follow on offering refers to the sale of shares by a publicly traded company following an initial public offering.
Companies looking to issue follow on public offerings must comply with the rules and regulations applicable to the sale of shares to the public.
This means that the issuer should register the offering with the regulators and provide a prospectus to shareholders, among other things.
When the follow on shares are issued, either the company creates additional shares or issues shares from its treasury.
The main purpose for issuing follow on shares is for a company to fund its business operations or change its capital structure.
Now that you know what a follow on offering is all about and how it works, good luck with your research!
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