Even if you are a casual reader of financial news, you would have come across these two terms – Initial Public Offering (IPO) and Follow-on Public Offering (FPO). However, to make the most of such offerings, it is important to understand the difference between an IPO and an FPO.
What is an IPO and an FPO?
When a private company offers its shares to people for investment for the first time, it is called an IPO. However, when an already listed company issues new shares to people, it is called an FPO.
An IPO is the first step taken by a company to become public. However, an FPO is required when a company needs more funds after it has already approached people for investment through an IPO.
Typically, the offer size tends to be large in the case of an IPO. This is because an IPO’s proceeds are mostly used for a company’s growth and expansion. However, the offer size tends to be small in an FPO because its proceeds are utilized for a specific corporate purpose.
Why should you choose an FPO over an IPO?
If you are confused between going for an IPO and an FPO, then you should typically choose an FPO over an IPO. Here is why:
- An FPO is comparatively less risky than an IPO: When a company announces its IPO, it approaches people for the first time for investment. While it provides a lot of financial data in its prospectus, it is still quite risky to invest in its IPO because its share is yet to get listed on a stock exchange. Hence, it is tough to anticipate how it will perform. However, when you invest in a company’s FPO, the company is already listed. Therefore, you can easily analyse how its stock has performed based on its performance in the past. Hence, an FPO is less risky than an IPO.
- Lesser ambiguity about price: When a company comes out with an IPO, it typically announces a price-range for investors to place their bids. As an investor, you need to analyse the demand for a company’s shares and then place your bid. However, if the cut-off price of an IPO ends up being higher than your bid, then you will not be allotted any shares in the IPO allotment process. On the other hand, in an FPO, shares are either offered at the current market price or at a slight discount to it. Hence, in an FPO, it is not as difficult to anticipate the price as in an IPO.
- Better awareness about a company’s management: Typically, investors have more information about the management of a company coming out with an FPO than a company issuing an IPO. In the case of an FPO, the issuing company is already listed. And, the management of a listed company is better covered by journalists, analysts, and other experts than the management of an IPO-issuing company because such companies are yet to be listed. Even if the management of an FPO-issuing company is not widely covered by the media, investors can still make an informed opinion about its management by analysing the vast amount of financial data available about such a company.
Conclusion
It is not difficult to understand the difference between an IPO and an FPO. When investing, you should prefer an FPO over an IPO. That said, you should not blindly make this decision because a lot depends upon the context.
Suppose a company has announced an FPO to reduce its debt and you learn that it had raised significant debt recently, then you should ask as to why it raised so much debt.
Whether an IPO or an FPO, you should always analyse why a company wants to raise funds, what it intends to do with them, how its performance has been, and how it is likely to perform in the future. You should make a decision only after doing this analysis.
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