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The debt ratio is the second most important ratio when it comes to gauging the capital structure and solvency an organization. This article provides an in-depth look. Formula Debt Ratio = Total Debt / Total Capital The debt ratio is a part to whole comparison as compared to debt to equity ratio which is a […]
Opportunity Cost of Capital – Alternate Uses of Money
Opportunity cost of a capital is a term unique to economics and finance. It is unique in the sense that you will not find mention of opportunity cost of capital in the accounting books. It is not an explicit cost which is paid out of the pocket. Hence, there is no mention of this cost […]
Disadvantages of Private Equity Investment in Sporting Franchises
In the previous article, we have already seen that private equity firms are making a beeline in order to invest in sporting franchises. This is happening because private equity investments seem to have reached the saturation point in other industries. The sporting industry is providing an opportunity for high growth. This is the reason why […]
Cultural Influences on Financial Decisions
The financial decisions made by an investor are actually influenced by several factors that are present in their thought process. We have discussed about the rational aspects of traditional financial theory. We have also discussed about emotional aspects and behavioral biases in the previous articles. However, emotions are not the only thing that impact behavior. […]
Current Ratio – Formula, Meaning, Assumptions and Interpretations
The current ratio is the most popularly used metric to gauge the short term solvency of a company. This article provides the details about this ratio. Formula Current Ratio = Current Assets / Current Liabilities Meaning Current ratio measures the current assets of the company in comparison to its current liabilities. This means that the […]
The common perception is that companies need to cultivate relationships with investment bankers only if they are unlisted and need to go public. It is believed that once they have already gone public, the services of investment banks have limited utility for these firms. However, that is not true. There are many already listed companies which use the follow on public offer (FPO) route to raise funds. In this article, we will have a closer look at what follow on public offer means and how it is used by public companies in order to raise more funds.
A follow on public offer is an offer by a company which is already listed on the stock exchange to sell more shares to the common public. The difference between an IPO and FPO is that in an IPO, the company gets listed for the first time using an IPO process. However, after listing if the company wants to raise funds a second or third time, it is called a follow on public offer.
Theoretically, a company can raise funds as many times as it wants to use a follow on public offer. However, in reality, if the company approaches the market again, it comes under a lot of scrutiny. Investors immediately become defensive about why the firm needs more money. It will have to justify the application of new funds as well as the previous funds. If the firm is unable to provide such justification, the follow on public offer is likely to fail. This is where investment bankers help the firm. Although the documentation and regulatory requirements are significantly less, the prospective investors still need some form of documentation in order to justify the follow on public offer.
There are several types of follow on public offers which are issued in the market. Their details have been mentioned below:
Dilutive FPO: The first kind of follow on public offer (FPO) is called dilutive FPO. The reason behind this is that in a dilutive FPO, the underlying firms issue more shares. Since the value of the firm remains unchanged, and the number of shares outstanding increases, the value of each share drops. This is the reason why investors often react negatively to a dilutive follow on public offer (FPO). The share price starts heading downwards as soon as a dilutive follow on public offer (FPO) is announced.
Non-Dilutive FPO: A non-dilutive follow on public offer (FPO) is when the shares which are being sold are not newly issued. Instead, some shares which were privately held by the promoters or the board of directors are now being provided to the common public.
In theory, there is no reason for a non-dilutive follow on public offer (FPO) to reduce the share price of the company. This is because no new shares are being issued, and hence there isn’t direct monetary loss to the shareholder.
However, the fact that the insiders of the company are offloading their shares is often perceived negatively, and prices start to come down. This is also where the advisory services of investment banks are used in order to manage the public opinion and ensure the stability of the share price after a follow on public offer (FPO).
At The Market Offering: A third form of follow on public offer (FPO) is called at the market offering. Now, both dilutive, as well as,non-dilutive follow on public offer (FPO) is planned. This means that the date on which the shares will be issued is planned in advance, along with the price band. However, there is another kind of follow on public offer (FPO) called the at the market offering.
As a part of this offering, the issuing company informs the shareholders and the regulators that they intend to offer a certain amount of shares. However, the date and price at which these shares are issued is not decided in advance. Instead, the company just keeps an eye on the share price every day.
The day on which the share price increases is the day on which the company issues the additional shares. This helps the company raise maximum capital by selling a minimum amount of shares.
Needless to say that the advice of investment bankers is invaluable for the company attempting to time the market in order to raise maximum capital.
From an investor’s point of view, the question is that why should they invest in a follow on public offering (FPO) if they can simply purchase shares from the open market? For this reason, companies usually price the share units sold in an FPO slightly lower than the ones which are being traded in the market. This gives an incentive to many investors to buy and resell the shares in the secondary market while making a risk free profit.
Investment bankers play an important role in helping determine the price, which is high enough to meet the needs of the company and low enough in order to induce investors to buy.
The bottom line is that follow up public offerings (FPO) are another way for companies to raise cash. This procedure is once again intermediated by investment banks. Investment banks had helped companies raise over $712 billion in 2019 alone!
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