Follow-On Offering

Introduction

When a company wants to raise additional capital after its initial public offering (IPO), it may choose to conduct a follow-on offering. This type of offering allows the company to sell additional shares to the public, providing an opportunity for investors to increase their stake in the company or for new investors to enter the market. In this article, we will explore the concept of follow-on offerings, their benefits, and how they work in practice.

What is a Follow-On Offering?

A follow-on offering, also known as a secondary offering or subsequent offering, is a public sale of additional shares by a company that has already gone through an IPO. Unlike an IPO, where a company issues new shares to raise capital for the first time, a follow-on offering involves the sale of existing shares by the company or its major shareholders.

Follow-on offerings can take different forms, including both primary and secondary offerings. In a primary offering, the company issues new shares and receives the proceeds from the sale. On the other hand, in a secondary offering, existing shareholders sell their shares, and the company does not receive any proceeds from the sale.

Benefits of Follow-On Offerings

Follow-on offerings offer several benefits for both companies and investors:

• Capital raising: Follow-on offerings provide companies with an opportunity to raise additional capital to fund their growth initiatives, such as expanding operations, investing in research and development, or paying off debt. This can be particularly beneficial for companies in need of funds but do not want to take on additional debt.
• Liquidity: For existing shareholders, follow-on offerings provide an opportunity to sell their shares and realize their investment gains. This increased liquidity can be attractive to early investors or employees who hold a significant stake in the company.
• Market visibility: Conducting a follow-on offering can increase a company's visibility in the market and attract new investors. It signals confidence in the company's prospects and can help improve its reputation among investors and analysts.

How Follow-On Offerings Work

The process of conducting a follow-on offering involves several key steps:

1. Engaging underwriters: Companies typically engage investment banks or underwriters to manage the follow-on offering process. These underwriters help determine the offering price, structure the deal, and distribute the shares to investors.
2. Due diligence: Before the offering, the company and its underwriters conduct due diligence to ensure compliance with regulatory requirements and assess the market demand for the shares. This involves reviewing financial statements, legal documents, and market conditions.
3. Pricing the offering: The underwriters work with the company to determine the offering price. This price is usually set at a discount to the current market price to incentivize investors to participate in the offering.
4. Marketing and roadshow: Once the offering price is set, the underwriters market the offering to potential investors through a roadshow. This involves presenting the investment opportunity to institutional investors and high-net-worth individuals.
5. Allocation and distribution: After the roadshow, the underwriters allocate the shares to investors based on their orders. The shares are then distributed to the investors, and the company receives the proceeds from the sale of new shares in a primary offering.

Examples of Follow-On Offerings

Several well-known companies have conducted follow-on offerings to raise additional capital. One notable example is Tesla, which conducted a follow-on offering in February 2020. The company raised $2.31 billion by selling 2.65 million shares to the public. The proceeds from the offering were intended to strengthen Tesla's balance sheet and support its expansion plans.

Another example is Facebook, which conducted a follow-on offering in 2013. The company raised $3.9 billion by selling 70 million shares. The offering allowed Facebook to increase its cash reserves and provide liquidity to its early investors.

Conclusion

Follow-on offerings play a crucial role in the capital markets, allowing companies to raise additional capital and providing investors with opportunities to participate in the growth of successful companies. These offerings offer benefits such as capital raising, increased liquidity, and market visibility. By engaging underwriters, conducting due diligence, pricing the offering, and marketing to potential investors, companies can successfully execute a follow-on offering. Examples from companies like Tesla and Facebook demonstrate the effectiveness of this financing strategy. Overall, follow-on offerings are an important tool for companies to fuel their growth and for investors to diversify their portfolios and capitalize on investment opportunities.