A Brief Overview
Companies may find themselves needing to raise funds for a number of reasons. In such instances, they may seek to generate capital via the issuance of new stock. Initial public offerings, for instance, allow private companies to go public via this method. Following this, however, these companies may find themselves still needing to generate capital. Subsequent offerings become pertinent in this space.
Defining Subsequent Offerings
Subsequent offering refers to the additional stock shares a company issues after it has transitioned into being publicly owned via an initial public offering. As the name might suggest, therefore, subsequent offerings are made available via companies that already have a trading presence or via existing shareholders.
It is not uncommon for subsequent offerings to be made available via a stock exchange within the secondary market. This holds particularly true in the case of these stocks being offered to the general public.
Subsequent offerings allow for a company to generate capital and enhance its cash reserves. They embody either dilutive or non-dilutive offerings.
Understanding the Mechanisms of Subsequent Offerings
When a business designs to go public from its previously private holding, it makes its intent clear by advertising the same. It does so much that it can adequately generate capital by the issuance of shares via an initial public offering.
Companies that seek to go this route often make use of the services of one or more banks that provide underwriting services. These services include placing a price on the shares, working the market and advertising the offering.
Once this preparatory work is complete the company transitions into the public space. It then proceeds to sell its shares to institutional investors along with others within the primary market. Following this shares begin to trade within the secondary market and are available to the general public.
Subsequent offerings, therefore, are only possible once a company operates within the public space. They may also be referred to as follow-on offerings. Secondary offerings or follow-on public offerings are additional monikers employed as well.
What differentiates these shares from the ones made available at the start of an IPO is the fact that the prices tethered to subsequent offerings are ordinarily determined by the market as opposed to by underwriters.
A company can determine when it seeks to make subsequent offerings i.e., it is entirely responsible for when and if it issues new shares via the market. Else, a subsequent offering may take place via an existing shareholder who may choose to sell their shares via the market. The existing shareholder here may be the founder of the company or belong to the management.
It isn’t possible for two subsequent offerings to be identical. Subsequent offerings take on the form of dilutive and non-dilutive.
Apart from raising capital and enhancing cash reserves, subsequent offerings also allow for existing shareholders in the company to increase the value tethered to it.
Things to Keep in Mind
Subsequent offerings can on occasion be viewed with caution by existing shareholders. Owing to this very fact investors ought to consider the role that subsequent offerings play for them and how they might impact their investments.
First, though the subsequent offering must be categorized as a dilutive or non-dilutive offer and who is responsible for making these shares available.
Dilutive offerings refer to the issuance of new shares which in turn have the potential to dilute an investor’s holdings in the company under consideration. In instances such as this investors must decide whether or not the offer price matches the value of the company.
In instances of existing shareholders unloading their holdings, investors must aim to determine the position of the shareholder such that they acquire greater insight on the matter. On occasion, insiders might find themselves aware of information that other shareholders aren’t aware of. If a company’s CEO decides to unload a vast number of its shares, it may be indicative of something being awry.
Forms of Subsequent Offerings
As established above, subsequent offerings may be in the form of dilutive or non-dilutive offerings.
Dilutive Subsequent Offerings
Here, a company issues new stock shares owing to which the company’s entire set of shares increases owing to which the earnings accrued per share diluted.
Dilutive subsequent offerings may be made by a company such that it can raise capital for a number of reasons. These may range from making debt payments to focusing on growth and expansion. Cash reserves may also be sought to be increased such that the company is able to maintain its debt-to-value ratio.
Non-Dilutive Subsequent Offerings
Here, shares that are privately held by, say a company’s founders or directors may be offered for sale on a public level. Owing to the fact that there is no new issuance of stock, the earnings per share do not get diluted.
Investors may seek to take advantage of this offering for companies that have shares that are in great demand. This allows investors to diversify their business or personal holdings or acquire lock-in benefits.
Following the holding period that traditional initial public offerings may have in place, initial shareholders can choose to issue subsequent offerings via the non-dilutive offering route process.
One of the most prominent subsequent offerings was made possible by Facebook in 2013 which offered 70 million shares. Of these 27 million were made by the company and close to 43 million were provided by existing shares holders. Mark Zuckerberg coincidentally held 41 million of the 43 million shares.