Introduction
The world of finance and investments is a complex ecosystem, and one of the primary methods through which companies raise capital is through various types of public offerings. In this article, we’ll look into the details of one such offering – the Follow-on Public Offer (FPO). We’ll explore what FPOs are, their types, how they work, their benefits, and the disadvantages associated with them. We’ll also discuss a related idea called At-the-Market (ATM) FPOs, showing both their benefits and drawbacks.
A publicly traded company will use a follow-on public offer (FPO) to raise more money by distributing more shares to the general public. Let’s break this idea to make it easier to understand
1. Publicly-Listed Company: A company whose shares are already traded on a stock exchange is referred to by this term. These businesses have gone through an Initial Public Offering (IPO) in the past, where they first made their shares available to the public.
2. Additional Capital: Companies often require more funds for various purposes such as growth, debt repayment, research and development, or other business activities. They might decide to raise cash by selling more shares to investors rather than taking out loans to do so.
3. Offering New Shares: In an FPO, the business decides to issue and market an additional batch of shares to the general public. In addition to the shares that are now being traded on the stock exchange, these ones also exist.
4. To the Public: The shares are offered to the public at large for purchase by anybody desiring to invest in the business. This means that both existing shareholders and new investors can buy these additional shares.
5. Objective of FPO: The funds raised through the FPO can be used by the company for various purposes, depending on their needs and objectives. A business could use the money, for example, to increase its operations, buy more companies, engage in research and development, or repay debt.
6. Regulatory Process: To ensure transparency and fairness in the offering, an FPO must follow a regulatory process that includes legal and financial compliance. Businesses frequently collaborate with investment banks and underwriters to simplify the FPO process.
An FPO is a financial tool that enables closely-listed firms to generate more capital by selling more shares to the public. It gives businesses a way to finance their expansion and growth plans while allowing investors the chance to purchase more shares of the firm if they are confident in its future potential.
Types of FPO?
Dilutive Follow-on Public Offering (FPO)
When a publicly traded company issues additional shares to the public, diluting the ownership stake of current shareholders, this is known as a diluted follow-on public offering (FPO). In other words, when a company performs a dilutive FPO, it increases the total number of outstanding shares in the market, which can potentially reduce the ownership percentage held by existing shareholders.
For example, let’s say Company A has 1,000,000 shares outstanding, and an individual investor owns 10,000 shares, representing a 1% ownership stake in the company. If Company A conducts a dilutive FPO and issues an additional 500,000 shares to the public, the total number of outstanding shares becomes 1,500,000. The individual investor’s ownership stake is now reduced to 6.67% (10,000 / 1,500,000), showing the dilution effect.
Dilutive FPOs are typically used to raise capital for various purposes, such as funding expansion projects, reducing debt, or financing acquisitions. While they provide necessary funds, they can be seen as unfavorable by existing shareholders as they reduce their overall ownership and potentially lead to a decline in earnings per share (EPS).
Non-Dilutive Follow-on Public Offering (FPO)
On the other hand, a non-dilutive follow-on public offering (FPO) is a sale in which a traded company sells more shares without reducing the ownership position of current shareholders. This is achieved by the company either repurchasing some of its own shares in the market before the FPO or ensuring that the new shares issued are offset by a reduction in the number of outstanding shares through buybacks.
For example, Company B might at the same time buy back 500,000 of its own shares from the market if it decides to conduct a non-dilutive FPO and has 1,000,000 outstanding shares. In this case, the total number of existing shares stays at 1,000,000 even after it issues 500,000 additional shares in the FPO. The EPS and ownership percentages of the existing shareholders are maintained.
When a business needs to raise money without diluting the ownership stakes of its current shareholders, non-dilutive FPOs are often used. Compared to dilutive FPOs, they are often thought to be more beneficial to present investors.
Understanding the dilution impact of FPOs is important for investors and businesses as it may have a big influence on ownership, profitability, and the total value of the company’s shares.
There are several benefits of FPO.
1. Access to Additional Capital: One of the primary benefits of an FPO is that it allows already publicly-listed companies to raise additional capital from the stock market. This infusion of funds can be used for various purposes, including expanding operations, investing in research and development, reducing debt, or funding new projects. It provides a financial boost without the need to take on loans or high-interest debt.
2. Increased Liquidity: FPOs can increase the stock’s liquidity. Trading volumes often increase when there are more shares available on the market. By attracting more institutional investors and traders, this enhanced liquidity might make it simpler for shareholders to purchase or sell shares whenever they choose.
3. Market Visibility and Credibility: An FPO may improve a company’s market visibility and credibility. Investors may see this as a positive indication because it shows that the business is expanding and looking for further funding. More institutional and individual investors may become interested as a result of this enhanced reputation.
4. Flexibility in funding: FPOs provide a range of funding choices. Depending on the state of the market and their cash requirements, companies can decide when to launch the offering. With this freedom, companies may timing the offering to coincide with when they think the price of their shares is beneficial.
5. Diversification of Shareholder Base: An FPO can diversify the shareholder base by introducing new investors. An ownership structure that is more stable and balanced might result from a larger investor base, which can lessen the impact of a few powerful stockholders.
6. Enhanced Transparency: Companies that are publicly listed are subject to strict disclosure and reporting requirements. An FPO helps to strengthen a commitment to transparency and openness. The trust of shareholders and potential investors may increase as a result.
7. Institutional investors that like to invest in well-established publicly traded companies, such as hedge funds, mutual funds, and pension funds, are frequently drawn to FPOs. These institutions’ involvement may bring in a sizable amount of money and maybe improve the performance of the company.
8. Financing Growth efforts: Many businesses utilize the money raised from FPOs to fund growth efforts including mergers and acquisitions, moves into unexplored areas, and the introduction of ground-breaking goods and services. The growth goals of a corporation may be accelerated by this money infusion.
9. Reduced Debt load: Companies might pick FPOs to reduce their debt load rather than depending on loans or bonds to generate cash. Lower interest costs and a healthier balance sheet may result from this.
What is the At-the-Market (ATM) FPO.
An ATM FPO is a type of public offering through which a publicly-listed company sells its shares directly into the secondary market at prevailing market prices. This approach differs from traditional FPOs, where a company decides a specific offering price and issues a fixed number of shares through underwriters or investment banks.
The following are important characteristics of an ATM FPO
1. Direct Sale: In an ATM FPO, the company sells shares directly to the public through stock exchanges, bypassing the need for middlemen like underwriters.
2. Market Prices: The shares are sold at current market prices, which means the company can adapt to current market conditions. This flexibility allows for selling shares when the market considers it beneficial.
3. Gradual Process: An ATM FPO usually involves smaller, more frequent sales of shares over a longer period of time as opposed to a single, large offering. This systematic strategy can minimize market disturbance and provide reliable finance availability.
4. Continuous Offering: With ATM FPOs, businesses can issue shares as needed, which is very helpful for funding ongoing initiatives or meeting capital needs as they appear.
Let’s explore the benefits and drawbacks of At-the-Market (ATM) Follow-on Public Offers (FPO)
Benefits of ATM FPO:
1. Flexible Timing: One significant advantage of ATM FPOs is their flexibility in timing. Based on favorable market conditions, companies might decide when to sell their shares. They may take advantage of times when their stock price is high thanks to this flexibility, which increases their earnings.
2. Market Pricing: In most cases, ATM FPOs include the sale of shares at current market rates. As a result, the firm may be able to sell its shares for higher prices than they would under a fixed-price offering by taking advantage of any increases in the stock price.
3. Lower Transaction Costs: ATM FPOs can have lower transaction costs compared to traditional FPOs. This is because they involve gradual sales over time, avoiding the need for a single large offering event that may face higher fees and expenses.
4. Reduced Price Risk: Companies conducting ATM FPOs can minimize the price risk associated with traditional FPOs. In traditional FPOs, companies set a fixed offering price in advance, and if market conditions decline they may have to offer shares at a discount, possibly diluting existing shareholders. The company may respond to shifting market conditions using ATM FPOs, lowering the risk of underpricing its shares.
ATM FPO disadvantages:
1. Timing Challenges: While flexibility is an advantage, it can also be a disadvantage. Companies conducting ATM FPOs must carefully time their sales to maximize returns. If market conditions are unfavorable for a long time, it may take longer to complete the offering, delaying the infusion of capital.
2. Potential Dilution: Gradual sales of shares through ATM FPOs can lead to reducing ownership for existing shareholders over time. If the company sells a significant number of shares through ATM FPOs, it can impact the ownership stakes of current investors.
3. Limited Capital Influx: ATM FPOs may not be suitable for companies requiring an immediate and substantial influx of capital. Since the sales occur over time, it may take some time to raise the desired amount of funds. Companies with urgent capital needs might opt for other financing methods
Conclusion
Follow-on Public Offers are an important way for already publicly-listed companies to raise additional capital and fuel their growth. They come with their set of advantages and disadvantages, and understanding the nuances of FPOs, including ATM FPOs, can be valuable for both investors and companies navigating the world of finance.
Frequently asked question
An IPO is the first time a company goes public and issues shares to the public. In contrast, an FPO occurs when a company that is already publicly traded issues more shares to raise additional capital.
full form of FPO is Follow on Public Offer
Yes, foreign investors, including foreign institutional investors (FIIs) and foreign portfolio investors (FPIs), are typically allowed to participate in Indian FPOs, subject to regulatory guidelines and restrictions.
Dilution FPO: Reduces existing shareholders’ ownership stakes, often for regulatory compliance or providing an exit for early investors.
Non-Dilution FPO: Raises fresh capital for the company’s growth, expansion, or other operational needs.