Follow-on Offering (FPO): Definition, 2 Main Types, And Example

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Follow-on Offering (FPO): Definition, 2 Main Types, and Example

Welcome to our finance blog! Today, we will be discussing an important topic in the world of finance – follow-on offerings (FPO). If you’ve ever wondered what an FPO is, how it works, and what its main types are, you’ve come to the right place. In this blog post, we will provide a comprehensive overview of FPOs, along with a real-life example. So, let’s dive in!

What is a Follow-on Offering?

A follow-on offering (FPO) is a method through which a publicly traded company raises additional capital by issuing new shares to the public. It is a form of public offering that enables existing shareholders to sell some of their shares while simultaneously allowing the company to raise funds for various purposes, such as expansion, acquisitions, or debt repayment.

Main Types of Follow-on Offerings

There are two main types of FPOs: dilutive and non-dilutive. Let’s explore each type in detail:

1. Dilutive FPO: In a dilutive FPO, the company issues additional shares to the public, which leads to the dilution of existing shareholders’ ownership. The new shares are typically offered at a lower price than the current market price, which can cause the stock price to decrease. However, this type of FPO provides the company with much-needed capital to fuel its growth or meet financial obligations.
2. Non-dilutive FPO: Unlike dilutive FPOs, non-dilutive FPOs do not involve the creation of new shares. Instead, the company sells a portion of its existing shares held by insiders or major shareholders, such as institutional investors. Since no new shares are issued, there is no dilution of existing shareholders’ ownership. Non-dilutive FPOs allow these shareholders to monetize their investments while providing liquidity to the market.

Example of a Follow-on Offering

Let’s take a look at an example to better understand how an FPO works. Company XYZ, a leading technology firm, is planning to expand its operations into new markets. To raise the required capital, XYZ decides to conduct an FPO. In this case, XYZ opts for a dilutive FPO and issues additional shares to the public at a discounted price. The new shares are quickly snapped up by investors, providing XYZ with the necessary funds to execute its expansion plans effectively.

In Conclusion

Follow-on offerings (FPOs) are crucial financial tools that allow publicly traded companies to raise capital by issuing additional shares to the public. By understanding the two main types of FPOs – dilutive and non-dilutive – investors can better assess the implications of such offerings on their investments. Dilutive FPOs may lead to ownership dilution but provide companies with much-needed capital, while non-dilutive FPOs allow shareholders to monetize their investments without affecting overall ownership stakes.

We hope this blog post has provided you with valuable insights into the world of FPOs. If you have any questions or comments, feel free to reach out to us. Stay tuned for more informative blog posts on various finance-related topics!