What a Follow-On Offering Is, and What It Costs Holders

“Prices public offering of 5,000,000 shares of common stock at $37.00 per share.” That headline tends to land after the close, often the evening after a stock closed at a level the company liked, and by the next morning the quote has moved toward the offer price.

This is a public company going back for more equity. Sometimes it is announced one afternoon and priced that night. Sometimes it is marketed over a few days. Either way the price usually sits below the last close, because underwriters are placing a large block at once with buyers who want paying for taking it.

The deal in numbers

A hypothetical company’s stock closes at $40. That evening it prices 5,000,000 new shares at $37. Assume a hypothetical underwriting fee of 5% of the gross.

The company gets the net figure. The buyers in the offering got their shares $3 below yesterday’s close. You own a smaller fraction of a company with more cash.

How much smaller depends on the existing count. Say there were 50,000,000 shares before the deal. After it there are 55,000,000, so every existing holder’s percentage falls by about 9.1%, since 50,000,000 divided by 55,000,000 is 0.909, and whether that is a bad trade for you comes down to what the company does with $175,750,000. No filing can tell you that in advance. Run your own position through the share dilution calculator.

Primary and secondary shares

The word “offering” covers two different transactions, and the prospectus separates them.

A primary offering issues new shares. The company gets the money, the share count rises, and your slice shrinks.

A secondary offering is existing holders selling. Founders, early investors or a parent company unload stock they already own. No new shares are created. No cash reaches the company. Your percentage holds. The price can still drop while the market digests a large block.

Many deals mix the two. Read the split. When a prospectus pairs a primary tranche with a selling-stockholder tranche, a deal that sounds large may turn out to be mostly insiders cashing out, which tells you something quite different about the company than a deal made up mostly of new stock sold to fund the business.

Where to read the terms

The legal document is the prospectus supplement. It usually draws on a shelf registration already on file. A preliminary version often arrives first with a blank price. The final supplement fills it in.

The pricing press release gives the headline terms. Look for the share count, the price, the underwriters and any overallotment option, which lets the underwriters buy a set number of extra shares from the company within a short window after pricing, so that if they exercise it the dilution ends up larger than the headline figure.

An 8-K around pricing usually attaches the underwriting agreement. The price reaction gets a longer treatment in why stocks drop when a company sells more shares.

What people get wrong

The discount gets read as the cost to holders. It is part of it. Most of the price move comes from the new supply and whatever the raise says about the company’s cash needs, and the fee reduces what the company keeps from the gross.

Traders also treat the offer price as a floor. It holds only while the buyers in the deal are content to keep their stock, and buyers who took shares at a discount hoping for a quick gain can sell near $37 as readily as anyone else once the bounce fails to come.

Primary and secondary also get lumped together. Check which one it is before you rework your ownership sums. More reading on share supply and pricing sits under stock trading.