Seasoned Equity Offering

Any issuance of shares that occurs after a company’s initial public offering (IPO) on the stock market is referred to as a seasoned equity offering (SEO), secondary equity offering, or capital increase (also known as a Follow-on Offering). It has likewise alluded as an optional value offering wherein such action is done essentially to expand the capital by moving toward the monetary business sectors. The issuance, therefore, is by a company that is already public and is coming back to the market to raise more money. If a company’s capital structure requires it, it can use internal funding to raise long-term funds if the funds are sufficient. Companies may have follow-on offerings after they have already gone public for a number of reasons.

Reasons include:

  • Raise new money to fund operations
  • Grow the business
  • Buy new equipment and machinery
  • Purchase land or buildings
  • Pay down debt
  • Make mergers and acquisitions (M&A)
  • Recapitalize the business
  • Increase working capital

Given the probability that inward assets might be deficient to meet long haul needs for new item advancement, an extension of offices, or innovative work venture, all of which require critical measures of capital, raising assets, from outside sources turn into the lone practical other option. This may involve borrowing from financial institutions (acquiring debt) or selling common stock to current or new shareholders through a seasoned equity offering (selling equity). Since it is carried after the initial public offering, SEO is also known as a follow-on offering. The business moves toward the monetary business sectors with the expectation of social occasion more continues from the market. The business that extra issue shares are ordered under the class of blue-chip organizations.

A Seasoned Equity Offering is any post-IPO public issue of shares, while a Secondary Offering is the selling of current shareholders’ shares. It can be further divided into dilutive and non-dilutive seasoned problems. The non-dilutive issues for the most part cause existing investors who hold a bigger load of offers to sell their holding in full or to a limited extent. An IPO and a Follow On Offering can both comprise of Primary Offerings (shares sold by the organization) and Secondary Offerings (shares sold by existing investors). Although these two words are often used interchangeably, they are not interchangeable.

Existing shareholders quit when they see certain problems in a negative light or have a negative opinion of them. Given the current economic environment’s instability, the risk that potential cash flows may be inadequate is a valid concern. At the end of the day, different signs impact the decision of financing, negative signs from the heightening of the danger of monetary trouble from the utilization of obligation, positive signs from the tax reduction of obligation and the absence of weakening of proprietorship, positive signs from the board’s judicious endeavor of tasks, and negative signs from the executives submitting to pressure from existing investors not to give stock.

It could be a shelf offering if the seasoned equity offering is made by an issuer that meets certain regulatory requirements. When a company’s financial resources are inadequate to cover its high finance expenses on existing debt, it turns to seasoned equity offerings. It moreover depends on a particularly corporate occasion when the business envisions or sees another high development project in its pipeline. Such issues, in this manner, help organizations seek after an expansionary strategy and along these lines guarantee that the business develops notwithstanding confronting difficulties on the monetary front.

Current shareholders are not reduced by secondary offerings so the total number of shares remains the same (they sell directly to each other). Overstatements of operating income minimize the probability of SEO selection because the firm’s overall financial health seems too positive. The ratio of net working capital to total assets was used to calculate liquidity. If a company wishes to reach the capital markets, it makes an initial public offering. Then again, prepared value issues are gotten after the first sale of stock by the organizations that are recorded in the monetary business sectors.

The reasoning was that after the announcement, net working capital, or the extra funds from liquid sources after payment of current debts, decreased, and such firms used lack of liquidity as a factor in their SEO selection. The word “seasoned equity offering” actually refers to an offering made by a blue-chip company to help with business expansion and growth. This is incorporated after the initial public offering in order to raise money for company needs.

Information Sources:

  1. wallstreetmojo.com
  2. ijbhtnet.com
  3. corporatefinanceinstitute.com