You may have often heard, after doing good business and becoming profitable, a particular company decided to ‘go public’, to raise funds for its operations. Which is why it may have decided to issue an IPO or Initial Public Offering. Businesses usually start small and then they grow with the help of funding from venture capitalists, angel investors etc.
After having built some brand value and brought solidity in business, the logical next step is to scale up and get into newer geographies, diversify product and services and build scales of economy. For this, they need capital. This is when they tap the primary capital markets. When a company raises funds by allotting shares for the first time, it is called an IPO. But the main difference between IPO and FPO is when a company issues shares for the consecutive times, it is called a Follow-on Public offering or FPO. Apart from being able to raise money, an IPO is also a way to bring visibility to the company.
Main Differences Between IPO and FPO
- IPO Vs. FPO: Who is the issuer?
Through an Initial Public Offering, previously unlisted companies can go public and issue shares through subscription. IPO is the first step before shares of a company are officially listed for trading on stock exchanges.
A Follow-on Public Offering is a sale of shares by a publicly trading company for the second or third time or consecutive time.
- IPO Vs. FPO: Performance
Yet another difference between IPO and FPO is how much an investor knows about the company before buying allotted shares. In case of an IPO, all that investors have to go by is the company’s red herring prospectus. Here investors may want to subscribe to an offering based on market interest in the company, performance outlook, management, debt on the books, among other factors. Here investors have no previous guidance or track record. Though, there are some companies or traditional family businesses that have stayed profitable, stable and reputed whose IPOs are highly awaited by the markets.
In this case of an FPO, investors have some track record of how the previous public issues have performed and what the market interest was like, which may or may not be the best indicators of how the issue will perform this time around. Previous sales of equity stakes can be a good indicator of whether or not the stock is liquid.
- IPO Vs. FPO: Objective
Difference between an IPO and FPO may also have to do with whether the fresh capital raised is used for expansion or dilution of promoters’ stake.
The objective of an IPO is capital infusion by way of opening up ownership of shares in the company to the public. Companies can either raise funds by borrowing and increasing debt on their books or by selling ownership stake through an IPO. After an IPO, as the company grows, it may need more funds for expansion and be rightly in the position to dilute ownership further. That’s when an FPO is issued. The objective of an FPO is to diversify public ownership. FPO may also be issued to dilute the shareholding of the promoters.
- IPO Vs. FPO: Profitability
Because investing in an IPO is relatively riskier, and there are more unknowns, the investor is sufficiently compensated for the risk when they subscribe to an IPO. FPOs are relatively less risky than IPOs since there is more transparency and information available about the company.
While there is no way of knowing how an IPO will perform, it is essential to dig deeper into the prospects and fundamentals of the company. In this way, you can arrive at a well-informed decision. With an FPO, you will have more information at hand to make a well-analysed decision of whether you want a pie of the company’s future and if it is likely to deliver.