Follow-on Public Offer (FPO): What Is It and How Does It Work?
Most investors are familiar with the term “IPO,” which stands for initial public offering. An IPO is the first time a company issues stock to the public, an event that is sometimes termed “going public.” IPOs of promising companies can make investors a lot of money, but they tend to be difficult to participate in, with shares often being sold exclusively to sophisticated investors.
A follow-on public offer, or FPO, is similar to an IPO but differs in some crucial ways. Here’s what you need to know.
What Is a Follow-on Public Offer (FPO)?
A follow-on public offer (FPO) is a subsequent issue of stock to investors, after an initial public offering. Another term that is sometimes used to describe an FPO is a “secondary offering.”
Once a company has completed its IPO and is listed on a stock exchange, it can do an FPO in order to raise additional capital, to reduce debt or as a way for founders to liquidate some of their shares.
How Does an FPO Work?
There are two different kinds of FPOs, dilutive and non-dilutive. There are also ATM, or “at-the-market,” FPOs.
Dilutive FPOs
A dilutive FPO means that new shares are added, thus diluting the value of the current shares.
Here’s an example. Suppose ABC Company has an IPO and sells 100,000 shares of stock for $100 per share. The company’s market capitalization is therefore $10,000,000 — 100,000 shares x $100 per share — assuming there are no other shares. The company decides it needs additional capital, so it issues a dilutive FPO for 10,000 shares.
In this case, the price per share may drop in the short term, since there are now more shares available, but the company’s value hasn’t changed. The share price will likely drop to about $90 per share, but if the company uses the additional capital to pay down debt or expand operations, the share price will likely recover.
The share price in a dilutive FPO may be less than the market price of existing shares, to entice investors to purchase the FPO shares. This can further depress the stock price.
Non-Dilutive FPOs
In a non-dilutive FPO, the number of shares does not change, but privately held shares are made available to the public to purchase. This type of FPO usually doesn’t impact the share price in the short term, as shares are simply being re-distributed among investors.
In this case, the company does not receive the proceeds from the sale of these shares — the money goes to the owners of the shares.
At-The-Market FPOs
There is another type of FPO known as an at-the-market (ATM) offering. This is an offering in which a company has the ability to raise capital as needed, instead of all at once, as it would with an IPO or FPO. The company offers shares to the public based on the share price on any given day.
If the share price is low, the company may choose not to offer any shares that day. If the price rises, the company may offer shares that day. This allows the company to get the prevailing price for new shares being offered and typically doesn’t impact the share price significantly, since the quantity of shares offered on a given day is typically fairly low.
Advantages of FPOs
An FPO can help an established company raise additional capital, which can be used to pay down debt or expand the company. It enables a company to use equity to grow — or to acquire another company — rather than taking on debt.
An ATM offering, in particular, allows a company to raise money over time, at prices that are most favorable to the company. It also has less market impact — meaning less potential for decline in the stock price — than a dilutive FPO.
Disadvantages of FPOs
A dilutive FPO can cause the stock price to decline, at least in the short term. Some companies have attempted a dilutive FPO not long after their IPO, and at a lower price than the IPO price. This tactic can result in a decline in the stock price, in addition to some angry shareholders.
Non-dilutive FPOs have the advantage of maintaining the stock price, but the proceeds go to the original shareholders — typically founders of the company — rather than to the company itself. The ability of the company to increase its capital is limited in a non-dilutive FPO.
Takeaway
FPOs are usually managed in the same way as IPOs, so they are often only available to institutional or sophisticated investors. While they may be less risky than IPOs, because investors have access to more company information as the company is already public, they are not more readily available to the average individual investor.
FAQ
- What does FPO mean?
- FPO stands for follow-on public offer, which is a secondary stock offering to investors following an IPO.
- What do IPO and FPO mean?
- IPO stands for "initial public offering." This is the first time a stock is made available to investors and is also referred to as "going public."
- FPO means "follow-on public offer." This is a second stock offering that follows the IPO and is used to generate additional capital for the company or to allow founders to liquidate their own shares.
- Can FPO shares be sold?
- Yes, but there may be an initial lock-in period, during which you cannot sell the shares. Once the lock-in period is over, the shares can be traded like any other stocks.
