The stock market, a dynamic and complex environment, offers various instruments for companies to raise capital and for investors to grow their wealth.
Among these instruments, Follow-on Public Offering (FPO) stands out as a significant method for companies to garner additional funds after their Initial Public Offering (IPO).
In this article, we will look at the FPO meaning, FPO origin and FPO types in detail, and provide a comprehensive overview of this important financial mechanism.
Meaning of FPO
FPO full-form is “Follow-on Public“. FPO means- a process in which a publicly traded company issues additional shares to investors after its initial public offering (IPO).
This method helps the company raise more capital for various purposes such as expanding operations, paying off debt, or funding new projects. FPOs can be made through either the issuance of new shares or the sale of existing shares by current shareholders.
Origin of FPO
The concept of FPOs emerged as the financial markets evolved, particularly in the 20th century, to provide established companies with a mechanism to access additional capital markets post their IPO. The need for FPOs became more pronounced as companies began to require substantial funding beyond what could be initially raised during an IPO. This additional round of funding allowed companies to leverage their market presence and expand their capital base without resorting to alternative and often more expensive financing methods such as debt.
Types of FPO
FPOs can be broadly classified into two types: Dilutive and Non-Dilutive FPOs. Each type has distinct characteristics and implications for the company and its investors.
1. Dilutive FPO
A Dilutive FPO involves the issuance of new shares by the company. When these new shares are introduced into the market, they increase the total number of shares outstanding. This process can lead to the dilution of existing shareholders’ equity since the ownership percentage of each existing shareholder decreases. Despite the dilution, this type of FPO is often undertaken to raise fresh capital to fund growth initiatives, research and development, or to improve the company’s balance sheet.
Advantages of Dilutive FPO:
- Raises substantial capital for expansion and development.
- Improves the company’s liquidity and financial stability.
- Can attract a broader investor base, increasing market visibility.
Disadvantages of Dilutive FPO:
- Dilutes existing shareholders’ ownership percentage.
- This may lead to a short-term decline in share price due to increased supply.
2. Non-Dilutive FPO
A Non-Dilutive FPO occurs when existing major shareholders, such as promoters or large institutional investors, sell their shares to the public. Unlike a dilutive FPO, the total number of shares outstanding does not change. Instead, ownership is transferred from existing shareholders to new investors. This type of FPO does not affect the equity base of the company but provides liquidity to the selling shareholders.
Advantages of Non-Dilutive FPO:
- Does not dilute existing shareholders’ equity.
- Provides liquidity to major shareholders.
- Can potentially improve market perception by increasing public float.
Disadvantages of Non-Dilutive FPO:
- No new capital is raised for the company.
- May be perceived negatively if major shareholders are offloading a significant portion of their holdings.
The FPO Process
The FPO process typically involves several key steps:
- Board Approval and Planning:
The company’s board of directors approves the decision to go for an FPO. The planning phase involves deciding the type of FPO, the number of shares to be issued, and the pricing strategy. - Regulatory Filings:
The company files the necessary documents with the regulatory authorities, such as the Securities and Exchange Commission (SEC) in the United States, detailing the FPO’s specifics. - Underwriting:
Investment banks or financial institutions underwrite the FPO, ensuring that the shares are sold at the best possible price. They may also commit to buying any unsold shares. - Marketing:
A roadshow and other marketing activities are conducted to attract potential investors. This phase involves presentations and meetings to explain the company’s prospects and the benefits of investing in the FPO. - Pricing:
The final price of the FPO is determined based on investor demand and market conditions. This could be a fixed price or a price range. - Allotment and Listing:
Once the shares are allotted to investors, they are listed on the stock exchange, making them available for trading.
In short, Follow-on Public Offerings (FPOs) play a critical role in the financial strategies of publicly traded companies. By understanding the meaning, origin, and types of FPOs, investors can make informed decisions and better comprehend how these offerings impact the market and their investments. Whether dilutive or non-dilutive, FPOs serve as essential tools for companies looking to raise capital and achieve their long-term business objectives.
