Follow-On Offering

What is a Follow-On Offering?

A follow-on offering (FPO) is when a public company issues more shares after their initial public offering (IPO). It happens when the company wants to raise more capital by giving out additional shares to finance projects, pay their debt, or make acquisitions.

When a company is issuing a follow-on offering, the shares they are giving out must be available to the general public, and it is not just offered to existing shareholders. Additionally, the company must’ve already offered an IPO and be publicly listed on a stock exchange. There are two types of follow-on offerings – diluted and non-diluted shares.

Types of Follow-On Offerings

1. Diluted

Diluted follow-on offerings happen when a public company issues additional new shares for individuals to invest in. The more shares they issue, the larger the denominator in the earnings per share becomes, which reduces the portion of earnings allocated to existing shareholders.

2. Non-Diluted

Non-diluted follow-on offerings are when existing investors of the stock sell their shares to the public. Since no new shares are issued in the market, and the shares offered for sale are already existing, the earnings per share remain unchanged.

Once the shares are sold, the proceeds go back to the original shareholders of the stock. Non-diluted offerings are also referred to as secondary market offerings.

Why Do Companies Issue a Follow-On Offering?

A public company typically wants to issue additional shares in order to infuse more capital into the organization. There may be various reasons why a company would want to raise more equity, such as:

• A company wants to use the proceeds from the sale of shares to pay off their existing debt, especially if their current debt levels are too high. They want to avoid debt covenants that can be highly restrictive on business operations.
• A company can issue more shares to increase its equity to rebalance its capital structure to remain at the desired debt-to-value ratio.
• The IPO did not raise enough capital to help its growth plans, so they want to issue more shares through another offering.
• The company prefers to raise capital through the issuance of shares rather than increase their debt and interest expense so they can finance new projects, acquisitions, or business expansions.

Examples of Follow-On Offerings

• In 2005, Google issued a follow-on offering of 14,159,265 shares of Class A common stock, which were sold at $295.00 per share.
• In 2013, Facebook announced they would offer an additional 27,004,761 new shares. 42,995,239 existing shares were also being offered by shareholders, including 41,350,000 shares offered by its chief executive, Mark Zuckerberg. They intended to use the proceeds from the selling of shares to finance corporate operations and increase working capital.
• Tesla also issued new shares several times following its initial public offering. They issued 5,300,000 new shares of common stock in 2011 and 4,344,930 new common shares in 2012. At the beginning of 2020, they announced an offering valued at $2 billion worth of stock. In December 2020, they announced another offering of $5 billion worth of stock.

Follow-On Offering vs. Initial Public Offering

Unlike an initial public offering, the price of a share of stock in a follow-on offering is market-driven because the company is already public and with existing shares listed on a stock exchange. Since it is public, potential investors can compare the market value versus the offering price of the company before purchasing shares.

Usually, shares in a follow-on offering are sold at a discount compared to the current market price of shares already in the market. This is to incentivize potential subscribers to buy the shares offered.

Also, shares are separated into diluted and non-diluted shares in a follow-on offering, but shares in an initial public offering are divided into common shares and preferred shares.

Additional Resources

If you would like to gain valuable skills that can help develop your journey in corporate finance, CFI is the official provider of the Capital Markets & Securities Analyst (CMSA)® certification program. CFI also offers a variety of courses and related readings for you to continue learning about topics related to investing:

• Capital Raising Process
• Loan-to-Value (LTV) Ratio
• Hot IPO
• Secondary Market
• See all equities resources