Difference Between an Initial Public Offering and a Follow-On Offering

An Initial Public Offering (IPO) is the first time a company offers its stocks to the public. This is usually issued by smaller and maiden companies looking for expansion.

Possibly, after an IPO, a Follow-On Offering (FOO) could take place. It could either be diluted or undiluted. As for the former, the new shares of the company are lower than its earnings per share (EPS), whereas the latter describes a tender involving additional shares.

The subsequent stocks offering is often registered to regulators when a firm is considering an offer of additional shares, which include submission of a formal legal document with the Securities and Exchange Commission.

Different to an IPO, the price of a FOO is derived from the market. An IPO uses a price range that the company is considering in shares selloff. Subsequent stocks offering is for a firm that has already traded publicly and has been regularly valued by market participants for at least 12 months.

Any investment financial firm working on follow-on offering does not naturally concentrate on valuation but on marketing efforts. A small discount is often offered alongside the price of the offering, which is derived from the closing price of the market on the transaction day.

There are two types of subsequent stocks offering, as mentioned above, starting with the dilutive. A dilutive follow-on offering takes place when a firm aims to raise more funds in the public market. Whenever this takes place, more shares are being issued by the company, but its value is sustained. Consequently, the offer size increases and per-share earnings decrease. The proceeds of this subsequent stocks offering are normally utilized to change the capital structure of a firm or pay borrowings.

The second type is a non-dilutive follow-on offering, which occurs when current shares kept privately by the board of directors or founders are sold to the public. The proceeds of this subsequent stocks offering are accumulated by the shares seller and not to the firm. The EPS of the company is also unchanged since there is no issuance of new shares.

One example of subsequent stocks offering is Rocket Fuel (NASDAQ:FUEL) announcing its plan to sell additional five million shares. The decision streamlined its robust fourth quarter performance in 2013 and the company’s target to capitalize on its high price of share through supplementary fundraising. The firm settled on selling two million shares, whereas current stakeholders will offer around three million shares. Furthermore, the underwriters have the option to buy 750,000 shares in the said offering.

The subsequent stocks offering was valued at $34 for every share. The company’s public shares were soon traded at $44 each after a month of the tender. This means in a single month, the equity buyers gained nearly 30 percent.

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The Stock Signals Philippines is the online news media arm of Equilyst Analytics. Inc., an SEC-registered stock market consultancy firm in the Philippines that guides Filipinos on long-term investing and short-term trading and offers mentoring services.
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The Stock Signals Philippines is the online news media arm of Equilyst Analytics. Inc., an SEC-registered stock market consultancy firm in the Philippines that guides Filipinos on long-term investing and short-term trading and offers mentoring services.

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