Follow-On Offerings (FPOs): Raising Additional Equity After the IPO

Executive Summary

• What it is: A follow-on offering (FPO) issues additional shares after the IPO.
• Why it matters: Funds growth, M&A, or deleveraging while increasing float and liquidity.
• Types: Primary (new shares, dilutive) vs. Secondary (existing holders sell, non-dilutive).

Core Structure
1) Use of Proceeds

• Primary FPOs raise capital for expansion, R&D, capex, acquisitions, or balance sheet repair.
• Secondary offerings provide liquidity for insiders/VCs without raising new company cash.

2) Deal Formats

• Fully marketed: 2–4 day investor education; wider distribution; potential pricing support.
• Accelerated bookbuild (ABB): Overnight/one-day wall-cross; speed reduces market risk.
• Bought deal: Underwriter purchases all shares, assuming market risk for a fee.

3) Pricing Mechanics

• Discount to last close/ VWAP to incentive uptake; typical 2–8% depending on size/volatility.
• Key determinants: Offer size as % of float, recent performance, investor mix, lock-up context.
• Allocation: Tiered between long-only, hedge funds, and existing holders to stabilize post-trade.

4) Dilution and Float

• Primary FPO increases share count; EPS dilution unless proceeds create value above cost of capital.
• Larger public float can tighten spreads, deepen book, and improve index eligibility.

5) Regulatory & Documentation

• Shelf registration (e.g., SEC Form S-3) enables rapid takedowns.
• Prospectus supplements detail use of proceeds, risk factors, and underwriting terms.

6) Execution Timeline

• Pre-soundings and wall-cross → launch → bookbuild → price → allocate → T+1 settlement.
• Stabilization: Greenshoe/over-allotment supports aftermarket performance.

Worked Example
Company XYZ runs an ABB for 15M shares (~7% float) at 4% discount to last close.

• Proceeds: $450M to repay revolver and fund AI capex.
• Impact: EPS -2% near-term; leverage drops from 2.4x to 1.6x; liquidity improves.

Investor Checklist

• Evaluate dilution vs. ROIC on proceeds deployment.
• Scrutinize discount vs. historical norms and deal size.
• Assess lock-ups, insider participation, and underwriter quality.
• Model pro forma ownership, leverage, and EPS.

Glossary

• ABB: Rapid bookbuild to price overnight/next-day.
• Greenshoe: Option to sell 15% extra shares for stabilization.
• Shelf: Registration enabling quick securities issuance.

SEO Keywords
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