IPO vs FPO: Differences, Objectives, Advantages
Initial Public Offering (IPO) is the process through which a private company raises funds by offering its shares to the public for the first time. On the other hand, a Follow-on Public Offering (FPO) is the process through which a company that is already listed on the stock exchange raises additional capital by offering its shares to the public. IPOs and FPOs are important tools for companies to raise capital for growth and expansion, increase visibility and liquidity, and provide an exit strategy for early investors and founders. In this blog, we’ll look at IPOs vs FPOs in several key aspects, including timing, size of offering, and regulatory requirements.
IPO (Initial Public Offering)
An IPO stands for Initial Public Offering. It is the first time a company sells its shares to the public, allowing them to become shareholders in the company. The primary objective of IPO is to raise capital for the company’s growth and expansion plans.
Process of IPO
The process of an IPO typically involves the following steps:
- Hire an investment bank or underwriter to manage the process.
- File a registration statement with the Securities and Exchange Commission (SEC).
- Conduct a roadshow to market the IPO to potential investors.
- Price the shares and allocate them to investors.
- List the shares on a stock exchange and begin trading.
Advantages and Disadvantages of IPO
Advantages of an IPO include access to a large pool of capital, increased visibility and credibility, and the ability to provide an exit strategy for early investors and founders.
Disadvantages include the high costs of going public, increased regulatory requirements, and the loss of control for the company’s founders.
What Does IPO Indicate for Companies?
When a company is initially established, it secures funding from investors, venture capitalists, corporations, and possibly the government. As the company grows and its funds dwindle or prove insufficient, it initiates an initial public offering (IPO) to become publicly traded on exchanges.
This entails receiving investment, which carries the responsibility of efficient management. The aim is to ensure shareholders do not incur losses while enhancing liquidity for both the company and its shareholders.
What Does IPO Indicate for Investors?
Purchasing shares in a company grants you partial ownership. When the company goes public, it introduces options like Employee Stock Ownership Plans (ESOP) that enable employees to own stock and enjoy benefits like profit sharing.
Types of IPOs
- Fixed Price IPOs- It involves the firm setting and maintaining share prices during the bidding process.
- Book Building IPOs- Here, investors determine share prices through bidding.
- Dutch Auction IPOs- This allows investors to bid on desired share quantities and their offered prices, with shares distributed to the highest bidders evenly.
FPO (Follow-on Public Offering)
An FPO is the process through which a company that is already listed on the stock exchange raises additional capital by issuing new shares to the public. The primary purpose of an FPO is to raise capital for the company’s expansion plans.
Process of FPO
The process of an FPO typically involves the following steps:
- Hire an investment bank or underwriter to manage the process.
- File a registration statement with the SEC.
- Conduct a roadshow to market the FPO to potential investors.
- Price the shares and allocate them to investors.
- List the shares on a stock exchange and begin trading.
Advantages and disadvantages of FPO
Advantages of an FPO include the ability to raise capital quickly and efficiently, lower costs compared to an IPO, and the ability to issue shares at a premium to the current market price. Disadvantages include the dilution of ownership for existing shareholders and potential market volatility due to increased supply of shares.
What Does FPO Indicate for Companies & Types of FPOs?
A Follow-on Public Offering (FPO) aims to raise capital and reduce existing debt. Unlike an IPO, an FPO can occur in two ways.
- Dilutive FPO: In a dilutive FPO, a company issues additional shares to the public without altering its value. This lowers the share price and earnings per share.
- Non-dilutive FPO: Larger shareholders, like founders and board members, conduct a non-dilutive FPO by selling their privately-held shares on the market. It doesn’t affect the total number of company shares but increases those available to the public, altering the company’s EPS, unlike a dilutive IPO.
IPO VS FPO: Key Differences
| Aspect | IPO | FPO |
|---|---|---|
| Definition | First time shares offered to the public | Additional shares offered to the public by a listed company |
| Timing | Private company becoming public | Public company issuing new shares |
| Purpose | Raise capital for growth and expansion | Raise additional capital for expansion |
| Size of offering | Typically larger | Typically smaller |
| Process and Requirements | Higher regulatory requirements and costs | Lower regulatory requirements and costs |
| Costs | Higher costs due to more extensive process | Lower costs due to less extensive process |
| Risk | Riskier than FPOs, as the company is relatively unknown and there is uncertainty about how the market will respond to its shares. | Less risky as the company is already established and has a track record in the market. |
IPO VS FPO: Factors to Consider
Here are a few factors you should consider when looking at the difference between IPO and FPO:
- Company Goals and Objectives: The primary goal of an IPO is to raise capital for the company’s growth and expansion. Conversely, for FPO it is to raise additional capital for the company. Companies need to assess their financial needs and determine which option best suits their goals.
- Market Conditions: Market conditions can affect the success of an IPO or FPO. Companies need to consider the overall market conditions, investor sentiment, and the company’s financial performance before deciding which option to pursue.
- Company Size and Stage of Growth: Smaller companies may find it more difficult to attract investors through an IPO and may benefit from an FPO instead. Companies also need to consider their stage of growth and financial performance when deciding which option to pursue.
- Investor Preferences: Companies need to consider investor preferences when deciding which option to pursue. Investors may have different preferences for the type of offering, such as investing in a new company through an IPO or investing in a company they already know through an FPO.
- Regulatory and Legal Requirements: Companies need to consider the regulatory and legal requirements associated with an IPO or FPO. IPOs have more stringent requirements and involve more regulatory scrutiny than FPOs.
Similarities Between IPOs and FPOs
There are a few rare similarities between IPOs and FPOs. They have been listed below:
- IPO and FPO both involve issuing new shares to the public to raise capital. Companies issuing these shares must obtain regulatory approval.
- After issuance, both iPO & FPO shares can be traded on stock exchanges and are underwritten by investment banks.
- Both processes enhance a company’s visibility and credibility, and they serve various purposes like expansion, acquisitions, and debt repayment.
To Wrap It Up…
IPO and FPO differ in timing, size of offering, process and requirements, and costs. It is important to consider the company’s goals and objectives, market conditions, company size and stage of growth, investor preferences, and regulatory and legal requirements when choosing FPO vs IPO.
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FAQs
Investors may gain higher returns in IPOs, participating in the company’s initial growth. FPOs are lower-risk, given full company info to investors.
Companies that previously raised funds via IPOs can issue additional shares through FPOs. This is a good choice for well-established firms with investor confidence.
In the 2018-19 Union Budget, the government addressed FPOs’ taxation bias, granting them a 100% tax deduction. The proposal extends this benefit to FPOs with turnovers up to Rs. 100 crores.
An FPO is a follow up on an IPO, occurring after a company lists on a stock exchange. It’s an additional share issuance, contrasting with the IPO’s initial offering.
A greenshoe option grants underwriters the right to buy extra shares at the IPO price in case of higher-than-expected stock demand.
IPOs may seem like lucrative opportunities, with high-profile companies making headlines due to substantial share price gains when they debut. However, it’s crucial to recognize that IPOs are volatile investments, yielding uncertain long-term returns.
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