Initial Public Offering (IPO) and Follow-on Public offering (FPO) are two very popular ways for companies to raise capital for any expansion purposes. While companies do have the option of debt and loans to finance their operations, Public offerings give them a way to fund these growths by inviting investors and showcasing confidence in their ideas without having to pay hefty fees and interest to banks. These are two basic terms in the world of finance and here we draw a parallel comparison between them.
An IPO is the first time that the company offers its shares to the public. Before this, the company is a private corporation whose stakes are owned by a select few entities. To go public, a company has to first follow a long list of due diligence, share all its financial statements and associate with an investment bank which will do all the valuations and estimations and will also handle the legal parts of the process. The main purpose is to get the public’s money for the company’s projects by offering them small stakes in the company.
Issuing an IPO means that the fundings from the VCs and institutional investors has run dry and the company needs more money. However it also comes with an added responsibility to run the company efficiently so that the shareholders do not lose their money.
When a company issues an IPO, before getting listed in the exchanges, the shares are allotted to interested buyers in an auction/lottery based process. This is called Subscribing to an IPO. Once the IPO is finally listed, the shares enter the market and trading starts on the company.
A follow-up public offering as the name suggests, is a second offering of shares by the company to the retail investors. This is done in order to raise more funds post the IPO and leads to a subsequent cash flow. There are broadly 2 types of FPOs
– Dilutive: In these FPOs, the company increases the number of shares but doesn’t change the valuation or market cap. This leads to a fall in the share price. By doing this, the shares of the company become affordable for a larger number of investors leading to higher investments and ideally a rise in the prices leading to a positive cash flow for the company in the end.
– Non- Dilutive: In this process, Shares that were previously privately held are made available to the public. For example, shares held by the Board of Directors. This is done by reducing the stake of these members and releasing these shares in the open markets. This method effectively doesn’t increase the number of shares of the company and only leads to a change in ownership.
Points of Difference between IPO and FPO:
– IPOs are riskier than FPOs because the company in the case of an IPO is relatively unknown. Their activities post going public are still to be discovered and hence leads to a higher chance of losses incurred for your investments. However in the case of FPOs, the company has already been listed for a while and its performance can be closely monitored before making investments.
IPOs therefore also need more research before investments than FPOs.
– The investment bank decides a price range for the subscription of the IPO.
– The price of shares are driven by the market’s prevailing conditions in the case of an FPO.
– Profit potential is always higher in the case of IPOs than FPOs. This makes sense because in the markets a higher risk usually corresponds to a higher potential reward. According to research, IPOs are many times undervalued, especially in India, which leads to a price boom post listing in many cases.
– In IPOs the share capital increases as it is the first offering made to the public
– In Dilutive FPOs the share capital increases whereas in non dilutive FPOs it remains constant.
Which to Pick?
If you have a large risk appetite and are looking for higher potential profits, then IPOs are a no brainer for you. However make sure to do your due diligence and look into the financials of the company you are investing in.
However, if you want to preserve your capital, or need steady profits and do not have the time to research deeply, FPOs are a safer bet for you.