Secondary Offerings are a way for companies to raise capital by a sale of new or closely held shares. This second offering comes after an initial public offering (IPO) has been already made yet for various reasons, the company wanted to raise more capital.
Type of Secondary Offerings
Secondary Offerings are usually of two kinds:
- Dilutive Secondary Offerings
- Non-dilutive secondary offerings.
1.Dilutive Secondary Offerings: In a dilutive secondary offering, an organization creates new shares of the company and puts them on sale for the public to buy. On the other hand,
2.Non-dilutive secondary: offerings.in a non-dilutive secondary offering, one (or many) major stockholders of the company decide to sell all or a big portion of their holdings in the company. This amounts to a sale of securities, the proceeds of which go to the stockholders that sold their holdings. Let’s take a deeper look:
Dilutive Secondary Offerings:
A Dilutive Secondary Offering is also known as a subsequent or a follow-on offering. It is when the company creates new shares by itself and places them into the market for sale. This causes dilation of existing shares and hence the name. As the number of outstanding shares increases, the pre-share earnings are diluted as well. This dilution of pre-share earnings can cause a jump down in the stock price, but as always, the stock market can be surprising at unexpected times. The capital generated from the dilutive secondary offerings is most of the time in line with the long term goals of the company. Oftentimes, this capital is used to pay off debts or finance a new venture.
Non-Dilutive Secondary Offerings:
In a Non-Dilutive Secondary Offering, there is no creation of new shares and thus there is no dilution of shares held by existing shareholders. This type of secondary offering is common in years to come after the initial public offering (IPO) once the lock-up period is over. Unlike the Dilutive Secondary Offerings, this type of offering rarely benefits the company directly. This is because the shares are put on sale by private stockholders like the directors or board members in the company. As the capital generated by the selling of private shares goes to the stockholder selling them, it does not benefit the company and is generally a way for these stockholders to diversify their portfolios.
The first logical step is to identify the type of offering involved when a company whose share you own decides to do a secondary offering. In the case of Dilutive Secondary offering, there needs to be an assessment if the new shares will show a fair value to the company — if the new shares are getting good prices, then there is no need to worry, it’s a positive sign. If the new shares are not getting a positive price tag, then the secondary offering might be a fire sale and one should take caution in this situation.
If a private shareholder is selling out their shares, it helps to know their position and holding in the company. If the seller is a high-ranking insider, it calls for introspection about the reason for selling out, and it is better to be on your guard in this situation.
Most often, Secondary Offerings get a bad rep but that doesn’t mean they are intrinsically bad. It is crucial to understand the motivation and reasoning behind the secondary offerings to make the best possible decision.