Follow-On Offering
Encyclopedia
A follow-on offering is an issuance of stock
subsequent to the company's initial public offering
. A follow-on offering can be either of two types (or a mixture of both): dilutive and non-dilutive. A secondary offering is an offering of securities by a shareholder of the company (as opposed to the company itself, which is a primary offering). A follow on offering is preceded by release of prospectus similar to IPO: a Follow-on Public Offer (FPO).
For example, Google
's initial public offering (IPO) included both a primary offering (issuance of Google
stock by Google
) and a secondary offering (sale of Google
stock held by shareholders, including the founders).
In the case of the dilutive offering
, the company's board of directors
agrees to increase the share float for the purpose of selling more equity in the company. This new inflow of cash might be used to pay off some debt
or used for needed company expansion. When new shares are created and then sold by the company, the number of shares outstanding
increases and this causes dilution of earnings on a per share
basis. Usually the gain of cash inflow from the sale is strategic and is considered positive for the longer term goals of the company and its shareholders. Some owners of the stock however may not view the event as favorably over a more short term valuation horizon.
The non-dilutive type of follow-on offering is when privately held shares are offered for sale by company directors or other insiders (such as venture capitalists) who may be looking to diversify their holdings. Because no new shares are created, the offering is not dilutive to existing shareholders, but the proceeds from the sale do not benefit the company in any way. Usually however, the increase in available shares allows more institutions to take non-trivial positions in the company.
As with an IPO, the investment banks who are serving as underwriters of the follow-on offering will often be offered the use of a greenshoe
or over-allotment option by the selling company.
A non-dilutive offering is also called a secondary market offering
.
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
subsequent to the company's initial public offering
Initial public offering
An initial public offering or stock market launch, is the first sale of stock by a private company to the public. It can be used by either small or large companies to raise expansion capital and become publicly traded enterprises...
. A follow-on offering can be either of two types (or a mixture of both): dilutive and non-dilutive. A secondary offering is an offering of securities by a shareholder of the company (as opposed to the company itself, which is a primary offering). A follow on offering is preceded by release of prospectus similar to IPO: a Follow-on Public Offer (FPO).
For example, Google
Google
Google Inc. is an American multinational public corporation invested in Internet search, cloud computing, and advertising technologies. Google hosts and develops a number of Internet-based services and products, and generates profit primarily from advertising through its AdWords program...
's initial public offering (IPO) included both a primary offering (issuance of Google
Google
Google Inc. is an American multinational public corporation invested in Internet search, cloud computing, and advertising technologies. Google hosts and develops a number of Internet-based services and products, and generates profit primarily from advertising through its AdWords program...
stock by Google
Google
Google Inc. is an American multinational public corporation invested in Internet search, cloud computing, and advertising technologies. Google hosts and develops a number of Internet-based services and products, and generates profit primarily from advertising through its AdWords program...
) and a secondary offering (sale of Google
Google
Google Inc. is an American multinational public corporation invested in Internet search, cloud computing, and advertising technologies. Google hosts and develops a number of Internet-based services and products, and generates profit primarily from advertising through its AdWords program...
stock held by shareholders, including the founders).
In the case of the dilutive offering
Stock dilution
Stock dilution is a general term that results from the issue of additional common shares by a company. This increase in common shares of a stock can result from a secondary market offering, employees exercising stock options, or by conversion of convertible bonds, preferred shares or warrants into...
, the company's board of directors
Board of directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
agrees to increase the share float for the purpose of selling more equity in the company. This new inflow of cash might be used to pay off some debt
Debt capital
Debt capital is the capital that a business raises by taking out a loan. It is a loan made to a company that is normally repaid at some future date...
or used for needed company expansion. When new shares are created and then sold by the company, the number of shares outstanding
Shares outstanding
Shares outstanding are common shares that have been authorized, issued, and purchased by investors. They have voting rights and represent ownership in the corporation by the person or institution that holds the shares. They should be distinguished from treasury shares, which is common stock held by...
increases and this causes dilution of earnings on a per share
Earnings per share
Earnings per share is the amount of earnings per each outstanding share of a company's stock.In the United States, the Financial Accounting Standards Board requires companies' income statements to report EPS for each of the major categories of the income statement: continuing operations,...
basis. Usually the gain of cash inflow from the sale is strategic and is considered positive for the longer term goals of the company and its shareholders. Some owners of the stock however may not view the event as favorably over a more short term valuation horizon.
The non-dilutive type of follow-on offering is when privately held shares are offered for sale by company directors or other insiders (such as venture capitalists) who may be looking to diversify their holdings. Because no new shares are created, the offering is not dilutive to existing shareholders, but the proceeds from the sale do not benefit the company in any way. Usually however, the increase in available shares allows more institutions to take non-trivial positions in the company.
As with an IPO, the investment banks who are serving as underwriters of the follow-on offering will often be offered the use of a greenshoe
Greenshoe
A greenshoe , legally called an "over-allotment option" , gives underwriters the right to sell additional shares in a registered securities offering at the offering price, if demand for the securities exceeds the original amount offered...
or over-allotment option by the selling company.
A non-dilutive offering is also called a secondary market offering
Secondary Market Offering
A secondary market offering, according to the U.S. Financial Industry Regulatory Authority , is a registered offering of a large block of a security that has been previously issued to the public. The blocks being offered may have been held by large investors or institutions, and proceeds of the...
.
External links
- http://www.iht.com/articles/2005/09/15/business/google.php