What is a Follow-on Public Offer (FPO)

What is a Follow-on Public Offer (FPO) and How Does it Work?

In the financial world, companies can raise capital through various means. One way they achieve this is by issuing shares to the public through an initial public offering (IPO). But what happens if a company needs more funds after they’ve already gone public? This is where follow-on public offers (FPOs) come in.

Think of an FPO as a sequel to an IPO. Just like a sequel to a movie, an FPO allows a company that is already listed on a stock exchange to issue additional shares to investors. Companies use FPOs for a variety of reasons, such as to:

• Raise capital to fund new projects or expand operations
• Pay off debt
• Acquire other companies

An FPO is essentially a way for a company to get more money without taking on more debt. There are two main types of FPOs, and understanding the differences is crucial for any investor.

The Two Main Types of FPOs

Dilutive FPO

This is the most common type of FPO. In a dilutive FPO, a company issues new shares, which increases the total number of shares outstanding. While this can dilute the value of existing shares (meaning each individual share represents a smaller ownership stake in the company), it’s often used to raise capital for growth opportunities that can benefit the company in the long run.

For example, let’s say a company has 1 million shares outstanding, and each share is priced at $10. If the company issues an additional 1 million shares through a dilutive FPO, the total number of shares outstanding will double to 2 million. This would likely cause the price per share to drop to around $5, because the same ownership stake (the company) is now divided among a larger number of shares.

Non-Dilutive FPO

In a non-dilutive FPO, existing shareholders such as company insiders or large investors sell their shares to the public. No new shares are created, so the total number of shares remains the same. This type of FPO doesn’t dilute the value of existing shares.

However, a non-dilutive FPO can raise a red flag for investors. If company insiders are selling a large portion of their shares, it might signal that they are losing confidence in the company’s future prospects.

How Does an FPO Work?

The process of an FPO typically involves the following steps:

1. The company files the necessary documents with the regulatory authority. This will involve a prospectus that outlines the details of the FPO, such as the number of shares being offered, the price range, and how the proceeds will be used.
2. A price band for the shares is set. This is a range within which investors can bid for the shares.
3. Investors bid for the shares within the price range. They will indicate how many shares they want to buy and at what price.
4. Shares are allocated based on demand. If there is more demand for shares than there are shares available, investors may only receive a portion of the shares they requested.
5. The shares are listed on the stock exchange for trading. Once the FPO is complete, the new shares will be listed on the stock exchange and can be traded by investors.

Benefits and Risks of Participating in an FPO

There are both benefits and risks to consider when deciding whether or not to participate in an FPO.

Benefits:

• The opportunity to buy shares at a potentially lower price. FPOs can sometimes offer shares at a discount to the current market price. This can be an attractive opportunity for investors who are bullish on the company’s long-term prospects.
• Invest in a company’s growth. By participating in an FPO, you are essentially investing in the company’s future growth. If the company uses the funds from the FPO wisely, it can lead to significant gains for shareholders in the long run.

Risks:

• Market volatility. The stock market can be volatile, and the price of a company’s shares can fluctuate significantly. This means that there is a risk that the price of the shares you purchase in an FPO could go down after you buy them.
• Dilution of shares. In a dilutive FPO, the value of your existing shares could be diluted if the company issues a large number of new shares.

Do Your Due Diligence before Investing in an FPO

Before investing in any FPO, it is important to do your due diligence. This means carefully researching the company and understanding how the proceeds from the FPO will be used.