Types, Benefits, and Key Difference between IPO and FPO

It is important for investors and companies seeking to raise capital in the stock market to understand the difference between IPO and FPO.

So, What is IPO and FPO? In simple terms, an IPO is like a grand opening for a company, where it first offers its shares to the public, allowing investors to buy a stake in the business. On the other hand, an FPO is more like a sequel, where a company that is already public offers additional shares to the market.

As an investor, it is crucial to understand the difference between IPOs and FPOs, as it can significantly impact your investment decisions. IPOs are generally riskier, as they involve newly established and untested companies entering the market. On the other hand, FPOs are a preferred choice for established companies seeking growth or capital infusion. 

For companies, knowing the difference is equally important, as it helps them determine the right method to raise funds and manage ownership. Choosing the wrong approach can negatively impact the company’s valuation and long-term prospects.

Continue reading the blog to know the difference between an Initial public offer vs follow-on public offer:

What is an IPO?

An Initial Public Offering (IPO) is a process through which a private company decides to sell its shares to the general public for the first time. This enables investors to purchase a stake in the company, and in exchange, the company raises capital to fund its growth. Additionally, the company becomes listed on stock exchanges, making its shares publicly available for trading.

The objective of an IPO (Initial Public Offering) 

The primary objectives of an IPO (Initial Public Offering) can be summarized in simple points:

1. Capital Raising: To raise funds for business expansion, debt reduction, or investment in new projects.

2. Access to Public Markets: To become a publicly traded company, allowing easier access to capital and liquidity for existing shareholders.

3. Enhanced Visibility: To increase brand visibility and reputation, attracting potential customers, partners, and employees.

4. Acquisition Currency: To use stock as a currency for mergers and acquisitions, facilitating growth and consolidation.

5. Diversification: To provide existing investors, such as founders and early backers, an opportunity to diversify their investments.

6. Benchmarking and Valuation: To establish a transparent market value for the company and create benchmarks for performance.

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Types of IPO

Types of IPO

There are three types of IPOs (Initial Public Offerings):

IPOs come in different types to suit the needs of companies and investors. Each type has its advantages and is chosen based on the company’s strategy and market conditions.

1. Fixed Price Offering: In this type, the company sets a fixed price for its shares before the IPO. Investors are informed of the price in advance, which makes it a simple process.

2. Book Building Offering: Companies using this method allow investors to bid for shares within a specified price range. The final offer price is determined based on investor demand during the bidding process, which promotes fair market value.

3. Dutch Auction IPO: Here, investors specify the number of shares they want and the price they’re willing to pay. The auction then determines the price at which the highest number of shares can be sold, ensuring transparency.

Benefits and risks associated with IPOs for companies and investors

Benefits of IPOs for Companies:

1. Access to Capital: When companies go public through an IPO, they have the opportunity to raise significant capital from the public. This money can be used for various purposes, such as expansion, research, or reducing debt.

2. Enhanced Visibility: Going public can increase a company’s brand recognition and credibility, making it more appealing to customers, partners, and potential employees.

3. Liquidity for Shareholders: Existing investors can sell their shares in the public market, enabling them to exit their investments and potentially reap profits.

4. Mergers and Acquisitions: Publicly traded stock can serve as a currency for acquisitions, making it easier for companies to grow and consolidate.

5. Employee Incentives: Going public makes stock options and equity grants more attractive to employees, which can aid in talent retention and recruitment.

Risks of IPOs for Companies:

1. Loss of Control: Public companies may face pressure from shareholders, reducing management’s control over the business.

2. Regulatory Compliance: Companies must adhere to strict regulatory requirements, incurring additional compliance costs.

3. Market Volatility: Share prices can be highly volatile, impacting the company’s perceived value and investor sentiment.

Benefits of IPOs for Investors:

1. Profit Potential: Investors have the opportunity to buy shares early and benefit from potential price appreciation.

2. Liquidity: Publicly traded shares can be easily bought or sold in the market, offering liquidity.

Risks of IPOs for Investors:

It is important for both companies and investors to carefully evaluate the benefits and risks associated with an IPO before contemplating or participating in it. Some of the challenges that IPOs may present include: 

1. Price Volatility: The stock prices of IPO companies may experience significant fluctuations, which could result in potential losses for investors.

2. Lack of Information: Newly public companies may have limited financial history and information available to investors, which could make it challenging to make informed decisions.

3. Market Sentiment: Investor sentiment can be influenced by hype and speculation, leading to overvaluation or irrational exuberance. It is essential to approach IPOs with a clear understanding of the potential risks and rewards involved.

What is an FPO?

A Follow-on Public Offering (FPO) refers to the process where a company that is already listed on the stock exchange decides to sell more of its shares to the public. This helps the company raise additional funds for various purposes, such as expansion or debt reduction, without having to go through the initial IPO (Initial Public Offering) process again.

Objective of FPO (Follow-on Public Offering)

1. Capital Raise: FPOs are conducted to raise additional funds for the company. These funds can be used to finance projects, reduce debt, or support ongoing operations.

2. Expansion: Companies use the funds from FPOs to expand their business operations, enter new markets, or invest in research and development.

3. Mergers and Acquisitions (M&A): FPOs can provide resources for potential mergers and acquisitions, allowing the company to diversify and grow.

4. Liquidity for Existing Shareholders: Existing shareholders can benefit from FPOs as they offer an opportunity to sell more of their shares. This provides liquidity and profit realization.

5. Enhanced Financial Position: FPOs can improve the company’s financial position by strengthening its balance sheet and reducing debt burdens.

6. Market Perception: Conducting a successful FPO can enhance the company’s reputation, demonstrating confidence in its growth prospects, and attracting investors and stakeholders.

Types of FPO

type of FPO?

In Dilutive FPO, a company issues additional shares to the public, which can reduce the percentage of ownership held by current shareholders. This happens because there are more shares in circulation.

In Non-Dilutive FPO, the company or insiders sell existing shares without creating new shares. This type of FPO does not result in ownership dilution for existing shareholders, as the percentage of ownership remains unchanged.

Benefits and risks associated with FPOs for companies and investors

Benefits of FPOs for Companies:

1. Capital Infusion: Follow-on public offerings (FPO) can help companies raise funds for expanding their business, reducing their debt, or making strategic investments. This, in turn, strengthens their financial position.

2. Existing Shareholder Liquidity: FPOs also provide an opportunity for insiders to sell their shares, allowing them to realize profits and providing liquidity to early investors and employees.

3. Market Visibility: By going through an FPO, a company can enhance its visibility and reputation in the market. This can attract potential partners and customers, helping the company grow and expand its reach.

Risks of FPOs for Companies:

1. Share Dilution: If the FPO involves issuing new shares, it can dilute the ownership of existing shareholders, reducing their stake.

2. Market Perception: FPOs may signal that the company needs additional capital, which could negatively impact investor confidence.

Benefits of FPOs for Investors:

1. Liquidity: Investors can buy or sell shares in the public market, providing liquidity and flexibility.

2. Opportunity to Invest: FPOs offer the chance to invest in established companies with growth potential.

Risks of FPOs for Investors:

1. Dilution: If new shares are issued, it can dilute the value of existing shares, potentially impacting the stock price.

2. Market Fluctuations: Share prices can be volatile, leading to potential losses for investors if the market fluctuates unfavorably. 

Investors and companies should carefully consider these factors before participating in an FPO.

Difference Between IPO and FPO

AspectIPO (Initial public offering)FPO (Follow-on Public Offering)
MeaningThe first time a company’s shares are sold to the public, transforming it into a publicly traded corporation.A corporation that is already publicly traded sells additional shares.
PriceIPO shares are typically priced lower to attract investors and build demand.FPO shares are typically priced near the market value of existing shares.
Share CapitalResults in an increase in the company’s overall share capital.It does not raise the company’s share capital; instead, it sells existing shares.
ValueSmaller or newer enterprises are frequently involved, and valuations can be questionable.It usually involves well-known enterprises with a known market value.
Risk Status of the CompanyHigher risk because IPO companies have never been tested in the public market.FPO companies are less risky because they are already established and have a track record.
Performance & ProfitabilityIPOs may lack a track record of profitability and performance.FPOs are often undertaken by organizations having a track record of success and profitability.

Final Thoughts

Investors need to carefully evaluate the risks and potential rewards associated with each investment option. Factors such as price volatility and the company’s track record should be taken into consideration. On the other hand, companies should choose the most suitable approach based on their financial needs and growth strategy.

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