An IPO or an FPO are two ways for a corporation to raise funds. This blog aims to explain the fundamental differences between IPOs and FPOs and how they are transferred through the stock market. There is a difference between FPOs and IPOs in share listing and timeline.
The company must be listed on a recognized Stock Exchange with its IPO for an FPO to exist. Whatever the size of your business, you know that capital is vital to its success. A larger business may need money to meet its cash flow needs or maintain and develop its operations. Either equity or debt can be used to raise fresh funds.
To raise funds through equity, firms sell their shares. A few key market-related fundamentals are introduced here for aspiring investors. The issuance of shares is one way for a firm to raise new cash. While there are various ways to offer a company's shares, there are two main sorts of public offerings.
A firm's shares are sold in the primary market in a public issue or offer to attract new investors and create funds. The general public can subscribe to the shares in such an issuance.
What is IPO?
When a private company sells its shares to the public, it is known as an initial public offering (IPO). An FPO listing occurs after a company has been listed on a stock exchange and has had its initial public offering (IPO).
What are the types of IPO?
Primary Public Offering
The shares that will reach the market are new, and in this form of offering, the money raised from the investing public is used to fund the company. The stock market functions as a source of financing for a company here.
Secondary Public Offering
The shares that reached the investing public were already existed, and the funds raised went directly to the former owners. Some of these placements allow partners to withdraw a portion of their profits or liquidate a group of early-stage investors.
What are the benefits of IPO?
- There is a possibility of obtaining more investment from a broad group of investors.
- Ability to offer potential employees stock and stock option plans, making the organization more appealing to top personnel.
- As the shares are easily traded, acquiring more liquidity is possible.
- When borrowing from financial institutions, you have more leverage.
- Capacity to offer securities in the purchase of other businesses.
- When the company's shares are publicly traded, you can attract the attention of market makers, mutual funds, institutional traders, and hedge funds.
- Businesses are subject to stringent reporting and compliance standards and increased public trust.
- Most major exchanges offer free advertising as deposit and registration fees. The company's shares will be linked to the stock exchange where they are traded.
What are the drawbacks of IPO?
A main disadvantage of IPO is:
Listing a firm on a stock exchange is lengthy and time-consuming, typically taking 6 to 9 months. The process involves the Financial Audit, Preparation of Registration Statement, and SEC Review Process.
An IPO has a lot of legal ramifications and comes with a lot of legal fees. The Securities and Exchange Commission (SEC) oversees listed firms' activities, and the company is subject to several rules and regulations and reporting requirements.
What is FPO?
Follow-on Public Offers (FPOs), often known as secondary offers, are debt-reduction securities issued by a stock exchange company. A Follow-on offering (FPO) is when a firm issue shares following its initial public offering (IPO).
When a company's EPS declines due to a subsequent diluted offering following the initial public offering, the company's earnings per share (EPS) are also lower. During a subsequent undiluted offering, the shares going to market are already in place, and there is no change in EPS.
A corporation must register the FPO and file a prospectus with regulators if it wants to issue new shares.
Why Do Businesses Launch a Follow-On Offering?
A corporation may issue an FPO to increase its stock base or raise funds to expand or pay off debt. The company can only issue an FPO after completing the IPO procedure, making its shares available to the general public.
Purpose of FPO
A firm may desire to issue more equity for a variety of reasons, including:
- To increase a company's capital. They wish to issue more shares through another offering because the IPO did not raise enough funds to support their expansion objectives.
- To minimize a company's existing debt. They would not want to be tied down by a loan that restricts their capacity to run their company. To maintain the ideal debt-to-value ratio, a corporation can issue new shares to grow its equity and rebalance its capital structure. Reduce the company's share in the owner stakeholders.
- To fund new initiatives, acquisitions, or business expansions, the corporation prefers to raise capital by selling shares rather than increasing debt and interest expenditure.
What are the types of FPO?
During a company's Initial Public Offering (IPO), an IPO is launched to raise funds for the company's operations, with the promise of profit returns to public investors. The shares on offer could be old or new.
As a result, two different sorts of shares are created:
Diluted Continuation Offer
When a corporation issues new shares, the number of outstanding shares increases, resulting in a diluted FPO. This FPO is done by businesses to raise additional funds. All existing shares are diluted in this sort of offer.
Undiluted Continuation Offer
An undiluted FPO occurs when a corporation does not issue new shares and sells existing shareholders' shares on the open market. The proceeds of undiluted FPO sales go to the shareholders selling their shares, not the corporation. This FPO does not result in the corporation issuing more shares.
At-the-Market Offering (ATM)
The opportunity to obtain funds as needed is provided by an at-the-market (ATM) offering. If the corporation is unhappy with the known share price on a particular day, it can choose not to offer shares. As they can sell shares into the secondary trading market at the current price, ATM offerings are often referred to as managed equity distributions.
How an FPO works?
An IPO is based on the firm's health and performance and the price per share the company intends to obtain during the IPO. The market determines the price of a later offer. Investors can analyze the company before purchasing because the shares are already traded on the stock exchange.
Following share prices are usually lower than the current market closing price. Buyers of FPOs should be aware that investment banks working directly on the offering prioritize marketing efforts overvaluation.
Following-up offers are made for a variety of reasons. A company may merely require funds to pay off debt or make acquisitions in certain circumstances. In some cases, investors in the company may be interested in receiving a cash offer.
Certain corporations may make successive offers to raise funds to repay debt during low-interest rates. Before investing their money in a company, investors should understand why it makes a future offer.
Facebook stated in 2013 that it would issue an extra 2 crores new shares. Existing shareholders offered 4 crores shares, including 4 crores offered by Mark Zuckerberg, the company's CEO.
Key Differences between FPO & IPO
IPO vs. FPO – Objective
An IPO distributes stock to the public to raise capital for a company to grow and expand. Issuing FPO is primarily intended for expanding a company's equity base. To receive an FPO, a company must have completed its first public offering (IPO) and its business development goal. You can reduce the Promoter participation in a company through FPO.
IPO vs. FPO - Property
The company will be privately held in IPO.
A publicly traded firm performs an FPO.
IPO vs. FPO - Regulatory
Initial public offerings (IPOs) involve extremely strict requirements that are both costly and time-consuming.
IPO vs. FPO - Risk Profile
Compared to IPOs, FPOs have less regulation, expense, and time. An FPO has fewer risks than an IPO since all the information about the company is available to the investor.
There is a significant danger involved. In comparison to an IPO, the risk is relatively modest.
IPO vs. FPO – Profitability
Due to investors participating in the company's growth, IPOs can be more profitable and provide bigger returns than FPOs. Investing in companies based on historical success also allows investors to make educated guesses about their future growth. In the early stage of a company's stabilization, FPOs are less profitable than IPOs.
IPO vs. FPO – Performance
The performance of FPOs and IPOs is very different depending on how much information or knowledge an investor has about a firm before they buy authorized shares.
When an IPO is conducted, investors must read the red herring prospectus and a preparatory document produced by the corporation.
Business investment is made by someone who has no expertise or proven record. As a result, based on management debt, market interest, and other considerations, they decide whether to subscribe to an IPO or not.
After a company goes public, an investor has access to all pertinent information regarding the company and a track record of market interest and performance.
The share prices of an FPO are already lower than the market's existing listed shares. The share market price gradually falls to the same level as the issuance price of an FPO. An FPO has been considered a safer bet for new and individual investors while less profitable than an IPO.
Until its FPO listing, a firm is in a stable state. Those with strong market expertise and a willingness to take risks can also invest in an IPO.
As the company has already demonstrated its market performance, investing in FPOs is less hazardous than investing in an IPO. For less-informed investors, adequate but not sophisticated information is accessible to help them make an investment decision.
To sum up, an IPO means that the company's shares are available to the general public. On the other hand, an FPO is the first-time issue of shares listed on a stock exchange to new investors or existing shareholders.