The basics of an IPO
Businesses and companies have various options at their disposal that they can use to raise capital. Initial Public offerings and Follow on Public Offerings are some of the options that entities use to meet their monetary needs.
IPOs and FPOs differ a great deal in the way they are carried out as well as the pricing, even though both of them serve the same purpose.
What is an IPO
An Initial Public Offering refers to the listing of a private company in a stock exchange. The listing provides a way for a private entity to go public, and in the process, raise capital by issuing equity in their company to retail and institutional investors. IPOs act as a turning point for many businesses as it acts as an effective way of raising money from the public to finance various projects.
The first step to an IPO involves a private entity selecting an Investment bank that provides advice as well as underwriting service to the entire process. Once an IPO is approved by a regulatory board, the issuing company and the underwriter must agree on the appropriate date and the price at which the shares will go on sale.
How IPOs are priced
The IPO price is the price at which a company would be able to raise capital, depending on the number of shares bought by investors. Factors taken into consideration when determining the IPO price include the condition of the economy, the company’s goal, as well as the success’ failure rate of the road shows carried out.
An IPO price is basically based on the health and performance of a company and what the company hopes to achieve per share after the offering.
It is common for underwriters to under price IPOs as a way of ensuring full subscription. The IPO price is, most of the time, enticing, arousing confidence that the share price would rise significantly immediately after the IPO.
What is a FPO
Unlike an Initial Public Offering, a Follow on Public Offering involves the issuance of shares of a company that is already listed on a stock exchange. It is essentially the issuance of additional shares after an Initial Public Offering.
A follow on Public Offering can be dilutive to current shareholders on a company’s board of directors who decide to increase the number of shares that will be in circulation. Companies opt to use this method to raise money to reduce debt or gain additional capital for business expansion.
The other option is non-dilutive, as it involves directors and current shareholders selling-off privately held shares. In this case, there is no creation or issuance of additional shares and is commonly referred to as a secondary offering.
How FPOs are priced
Pricing in a Follow on Public Offering is market-driven, and investors get a chance to value a company before buying. Given that a FPO comes into play on companies already listed on an exchange, the price is, most of the time, a discount to a stock closing market price.
While an IPO price is purely based on valuation, an FPO price will most of the time focus on marketing efforts.
IPOs Vs FPOs table
|Definition||Issuance of securities by a private entity to the public||Issuance of securities for subscription to the public by a publicly traded entity|
|Issuances Status||First Public Issue||Second or subsequent public issue|
|Issuer||Unlisted Company||Listed Company|
|Objective||Raising capital from the public for the first time||Push for subsequent investment from the public|
|Risk||High risk||Low Risk|