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Follow-On Offering

Definition

A Follow-On Offering, also known as a secondary offering, is a type of public sale of stock shares by a company that has already conducted an initial public offering (IPO). This is typically done to raise additional capital for the company. The new shares are issued and sold to the public, adding to the existing number of shares in the market.

Phonetic

The phonetic pronunciation of “Follow-On Offering” is: ˈfälō – ȯn ˈȯ-f(ə-)riŋ.

Key Takeaways

Sure, here are three main takeaways about Follow-On Offering:“`html

  1. Additional Shares: A Follow-On Offering is when a publicly-traded company issues additional securities to the market after its initial public offering (IPO). It is an excellent way for companies to raise extra capital.
  2. Two Types: There are two types of follow-on offerings. A primary follow-on offering is when new shares are created and the money goes directly to the company. On the other hand, in a secondary follow-on offering, existing shares are sold by company insiders or other large shareholders, and the proceeds go to these insiders or shareholders, not the company.
  3. Effects on Stocks: Follow-On Offering can often lead to a decline in a company’s stock price in the short term because of the increase in supply. However, the additional capital can help the company to grow in the long term, which can ultimately be beneficial for the stock price.

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Importance

A Follow-On Offering is a significant concept in business and finance as it refers to the issuance of additional shares by a company that’s already publicly traded. This is crucial for a couple of reasons. Firstly, it allows the company to raise more capital for business expansion, debt reduction, or to fund other corporate activities without needing to take on more debt. This can positively impact the financial health and stability of the company. Also, since these shares are issued by companies that are already public, the level of transparency and scrutiny is usually higher, which can potentially provide more reassurance for prospective investors. Despite diluting the ownership stakes of current shareholders, a successful follow-on offering can enhance the overall value of a company. Therefore, its importance lies in it being a practical tool for corporate financial management and growth.

Explanation

Follow-On Offering serves as a critical mechanism for publicly traded companies to raise additional equity capital in the financial markets. While the initial public offering (IPO) establishes a company’s presence on the stock exchange, the follow-on offering typically comes to play when that company wants to infuse additional capital into their business. This subsequent capital raising can be purposed for a range of operational or strategic needs, such as working capital, financing ongoing operations, acquisitions, or repayment of existing debt.The use of follow-on offerings allows companies to take advantage of their market position when their share prices are high, hence reaping significant capital inflows. Moreover, this avoids the need for borrowing and any associated interest costs. It also helps in diluting the ownership of existing shares. However, existing shareholders might be exposed to the risk of dilution in earnings unless the funds generated from the follow-on offering are successfully deployed towards enhancing the company’s profitability.

Examples

1. Alibaba Group Follow-On Offering: In 2019, Alibaba, the Chinese e-commerce giant, initiated a follow-on offering to raise around $13.4 billion in Hong Kong. This follow-on offering served to increase their capital base as well as improve liquidity. It also allowed Alibaba to expand its investor base and have a listing closer to home. 2. JD.com Secondary Offering: Another Chinese firm, JD.com, made a secondary, or follow-on, public offer in 2020. They listed their shares on the Hong Kong stock exchange, representing one of the largest follow-on offerings of the year. It was aimed at raising funds to invest in key supply-chain based technology initiatives.3. Twitter Follow-On Offering: In 2014, only six months after its initial public offering, Twitter announced a follow-on offering. The purpose was to raise capital and to allow some of its early private investors to cash out a portion of their equity stakes in the company. The follow-on offering raised Twitter nearly $1.82 billion.

Frequently Asked Questions(FAQ)

What is a Follow-On Offering?

A Follow-On Offering, also known as a Secondary Offering, is a type of public issue where a company sells additional securities to investors, after their initial public offering (IPO). It allows companies to raise capital for strengthening financial position or funding operations.

How does a Follow-On Offering differ from an Initial Public Offering (IPO)?

An Initial Public Offering (IPO) refers to the first time a company sells its shares to the public. A Follow-On Offering, on the other hand, occurs after the IPO and refers to any subsequent offering of shares to the public.

Why would a company choose to do a Follow-On Offering?

Companies often choose to conduct a Follow-On Offering when they need to raise additional capital. This could be for a variety of reasons like expansion, acquisitions, or debt repayment. It’s a flexible way to quickly generate funds without taking on more debt.

What are the downsides to a Follow-On Offering?

A Follow-On Offering can dilute the value of existing shares, lowering their price. It also indicates to the market that the company may be struggling financially, which may not always be the case. In some instances, it can also dilute the voting power of existing shareholders.

What is the difference between a dilutive and non-dilutive Follow-On Offering?

A dilutive Follow-On Offering means the company issues new shares, which can decrease the value of existing shares. A non-dilutive Follow-On Offering occurs when existing private shares are sold publicly. The latter does not impact the value of existing shares because no new shares are created.

Do shareholders have any rights in a Follow-On Offering?

Shareholders generally have preemptive rights in a Follow-On Offering. This means they can purchase enough shares in the new offering to maintain their percentage of ownership before the shares are offered to new investors.

Who decides the price for a Follow-On Offering?

The price for a Follow-On Offering is determined by the issuer and the investment bank underwriting the offering. They will consider factors such as market conditions, the company’s current valuation, and the number of shares being offered.

Related Finance Terms

  • Secondary Offering: This refers to the process of selling new or closely held shares of a company after the company has already made its initial public offering (IPO).
  • Initial Public Offering (IPO): The first sale of stock by a company to the public, preceding any follow-on offerings.
  • Dilution: This occurs when a company issues additional shares, which results in a decrease in existing shareholders’ ownership percentage of that company.
  • Underwriting: The process where investment banks raise investment capital from investors on behalf of corporations and governments that are issuing securities.
  • Lock-Up Period: A window of time in which investors of a private company are restricted from selling their shares to the public following an IPO or follow-on offering.

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