IPO & FPO In Detail
What is an ‘Initial Public Offering – IPO’
An initial public offering (IPO) is the first time that the stock of a private company is offered to the public. IPOs are often issued by smaller, younger companies seeking capital to expand, but they can also be done by large privately owned companies looking to become publicly traded. In an IPO, the issuer obtains the assistance of an underwriting firm, which helps determine what type of security to issue, the best offering price, the amount of shares to be issued and the time to bring it to market.
BREAKING DOWN ‘Initial Public Offering – IPO’
An IPO is also referred to as a public offering. When a company initiates the IPO process, a very specific set of events occurs. The chosen underwriters facilitate all of these steps.
• An external IPO team is formed, consisting of an underwriter, lawyers, certified public accountants (CPAs) and Securities and Exchange Commission (SEC) experts.
• Information regarding the company is compiled, including financial performance and expected future operations. This becomes part of the company prospectus, which is circulated for review.
• The financial statements are submitted for official audit.
• The company files its prospectus with the SEC and sets a date for the offering.
The Risk of Investing in an IPO
IPOs can be a risky investment. For the individual investor, it is tough to predict what the stock will do on its initial day of trading and in the near future because there is often little historical data to use to analyze the company. Also, most IPOs are for companies that are going through a transitory growth period, which means that they are subject to additional uncertainty regarding their future values.
For more information, examine on the interesting journey from the pre-IPO stage to the final IPO placement in the primary market: The Road to Creating an IPO and Interpreting a Company’s IPO Prospectus Report.
Example of an IPO
The rate of company IPOs often depends on macroeconomic factors as well as internal needs to raise capital. Through the first half of 2016, the amount of companies going public has declined, with total IPO value half of what it was through the first half of 2015. AdvancePierre Food Holdings Inc., a national sandwich and snack producer based in Ohio, announced the initiation of its IPO process on July 5, 2016.
The company is issuing roughly 11 million shares of its own common stock, and current shareholders are selling just over 7.5 million shares of common stock. Public offering price per share is expected to be around $20, raising total funds of around $400 million. Underwriters include Barclays, Credit Suisse and Morgan Stanley.
What is a ‘Follow On Public Offer – FPO’
A follow-on public offer (FPO) is an issuing of shares to investors by a public company that is already listed on an exchange. An FPO is essentially a stock issue of supplementary shares made by a company that is already publicly listed and has gone through the IPO process. FPOs are popular methods for companies to raise additional equity capital in the capital markets through a stock issue.
BREAKING DOWN ‘Follow On Public Offer – FPO’
Public companies can also take advantage of an FPO issuing an offer for sale to investors, which is made through an offer document. FPOs should not be confused with IPOs, as IPOs are the initial public offering of equity to the public, while FPOs are supplementary issues made after a company has been established on an exchange.
Two Main Types of Follow-On Public Offers
There are two main types of follow-on public offers. The first type is dilutive to investors, as the company’s Board of Directors agrees to increase the share float level. This type of follow-on public offering seeks to raise money to pay debt or expand the business. This increases the number of shares outstanding.
The other type of follow-on public offer is non-dilutive. This approach is used when directors or large shareholders sell privately held shares. This is non-dilutive, as no additional shares are sold. This method is commonly referred to as a secondary market offering. There is no benefit to this method for the company or current shareholders.
Knowing that there are two main types of follow-on public offers, and knowing the different effects they have, makes it incredibly important to pay attention to the identity of the sellers on offerings. Investors can tell from this whether or not the offering will be dilutive.
Follow-On Offerings Common
Follow-on offerings are common in the investment world. This is an easy way for companies to raise equity that can be used for common purposes. Companies that announce secondary offerings can see their share price fall as a result. Shareholders often react negatively to secondary offerings, as many come at below-market prices or dilute their existing shares.
In 2013, follow-on offerings produced $201.7 billion in equity raised for companies. This marked the largest amount in four years. Facebook sold $3.9 billion in additional equity and was one of the largest raisers. Secondary offerings are good for investment banks, as they get a piece of the fee pricing. Goldman Sachs managed $24.7 billion worth of secondary offerings in 2013 to lead the way.
In 2015, many companies had follow-on offerings after going public less than a year prior. Shake Shack was one company that saw shares fall on news of a secondary offering. Shares fell 16% on news of a large secondary that came in below the existing share price.
IPO is Initial Public Offering and FPO is Follow-up Public Offering. IPO comes first to Follow-up Public Offering as an FPO can only be given if there is an initial public offering.
IPOs are more profitable than FPOs. A company makes an IPO for compiling money and an FPO for adding to the initial public offerings.
Initial Public Offering is the first sale whereas the Follow-up Public Offering is the second sale for expanding businesses.
IPOs are risky investments as an individual investor cannot predict what will happen to the initial trading in the coming days. But in the case of FPOs, the risk is lower as an investor already has an idea about the investment and future growth of the company.
An Initial Public Offering is considered to be a period of transitory growth and so there is a certain uncertainty regarding the future.
A company brings out an FPO for further growth. If a company is coming out with an FPO, it also means that the company is short of funds. FPO is raised for more funds or money or for establishing new projects. FPOs can be of two types – dilutive and non-dilutive. In a dilutive FPO, the board of directors of a company agrees to increase the shares by selling more equity. A non-dilutive FPO means selling privately held shares of the directors or insiders of a company.
In IPO and FPO, the company never repays the capital but gives the shareholders a right to future profits of the company.
1.IPO is Initial Public Offering and FPO is Follow-up Public Offering.
2.A company makes an IPO for compiling money and an FPO for adding to the initial public offerings.
3.If a company is coming out with an FPO, it also means that the company is short of funds. An FPO is raised for more funds or money or for establishing new projects.
4.Initial Public Offering is the first sale whereas the Follow-up Public Offering is the second sale for expanding businesses.
5.IPOs are risky investments as an individual investor cannot predict what will happen to the initial trading in the coming days.
6.In the case of FPOs, the risk is lower as an investor already has an idea about the investment and future growth of the company.
7.Initial Public Offerings are more profitable than Follow up Public Offerings.