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

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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.

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