What is Seasoned Equity Offering?
The seasoned equity offering is defined as the additional offering of shares by the business after bringing in their initial public offering in the stock markets. It is also referred as secondary equity offering wherein such activity is done basically to increase the capital by approaching the financial markets.
This secondary issue is generally brought in by the companies that are already listed in the financial marketsFinancial MarketsThe term "financial market" refers to the marketplace where activities such as the creation and trading of various financial assets such as bonds, stocks, commodities, currencies, and derivatives take place. It provides a platform for sellers and buyers to interact and trade at a price determined by market forces.. It is also regarded as the follow on offering as it is brought after the initial public offeringInitial Public OfferingInitial Public Offering (IPO) is when the shares of the private companies are listed for the first time in the stock exchange for public trading and investment. This allows a private company to raise the capital for different purposes.. The business approach the financial markets with the intent of gathering more proceeds from the market. The business that additional issue sharesIssue SharesShares Issued refers to the number of shares distributed by a company to its shareholders, who range from the general public and insiders to institutional investors. They are recorded as owner's equity on the Company's balance sheet. are categorized under the category of blue-chip companies.
The seasoned equity offering can further be bifurcated into non-dilutive seasoned issues and dilutive issues. The non-dilutive issues generally cause existing shareholders who hold a larger stock of shares to sell their holding in full or in part. The existing shareholders perform such an exodus as they visualize such issues under negative light or under a bad impression.
Further such corporate events cause the share prices to deteriorate. Under dilutive issues, the shares issue new equities to the financial markets and raise further finance.
- The issue is generally brought by the publicly traded companiesPublicly Traded CompaniesPublicly Traded Companies, also called Publicly Listed Companies, are the Companies which list their shares on the public stock exchange allowing the trading of shares to the common public. It means that anybody can sell or buy these companies’ shares from the open market..
- This is done to raise additional finance by issuing new stocks or shares.
- The proceeds materialized are generally employed to fund existing debt.
- They can also be used to fund any new projects that are in pipelines.
- Such issues can dilute the ownership of existing stockholdersStockholdersA stockholder is a person, company, or institution who owns one or more shares of a company. They are the company's owners, but their liability is limited to the value of their shares..
- By bringing in such issues causes the value of each share to depreciate and the number of shares issued to increase.
Let us take the example of XYZ corporation. The business is looking forward to paying its debt and hence looking to raise additional finance by offering a seasoned equityEquityEquity refers to investor’s ownership of a company representing the amount they would receive after liquidating assets and paying off the liabilities and debts. It is the difference between the assets and liabilities shown on a company's balance sheet. issue. The business employs an underwriterUnderwriterThe underwriters take the financial risk of their client in return of a financial fee. Market Makers like financial institution and large banks ensure that there is enough amount of liquidity in the market by ensuring that enough trading volume is there. to facilitate the financial transaction.
The underwriter prepares the new prospectus and registers the transaction at the securities and exchange commission. After accomplishing the registration, it handles the sales of securities which it offers at the prevailing market price. The business then receives the proceeds by issuing securities at the prevalent market price, and the proceeds are then used to pay off the debt.
Let us take the example of the real world. The investment bank Goldman Sachs on April 13, 2009, initiated and completed a seasoned issue amounting to $5 billion. The proceeds so arranged and collected were used to redeem the TARP capital. TARP is an abbreviation that stands for the Troubled Assets relief program.
Since the company was itself an investment bankInvestment BankInvestment banking is a specialized banking stream that facilitates the business entities, government and other organizations in generating capital through debts and equity, reorganization, mergers and acquisition, etc., it handled the issue on their own. Hence, they bore negligible floatation costs and handled their own press releases and registrations. The Investment bank Goldman Sachs went public or had its initial public offering to take place in the year 1999, and it brought its first seasoned issue 10 years later down the timeline.
Let us take the example of a private investor. He or she offered to sell 1,000,000 shares to the general public in one lot. In this type of seasoned issue, the wealthy private investor gets the proceeds from the transaction, and the business does not get any proceeds. Such transactions do not dilute any existing ownerships.
Reasons for Seasoned Equity Offering
- To procure additional finance in order to fund business operations.
- To facilitate expansionary projects or projects that provide growth to the organization.
- To finance the purchase of new business machinery and equipment that would, in turn, help in revenue generation and improvement in business efficiency.
- To pay-off existing high-cost debt.
- To increase the levels of working capitalWorking CapitalWorking capital is the amount available to a company for day-to-day expenses. It's a measure of a company's liquidity, efficiency, and financial health, and it's calculated using a simple formula: "current assets (accounts receivables, cash, inventories of unfinished goods and raw materials) MINUS current liabilities (accounts payable, debt due in one year)".
- To pitch for mergers and acquisitions.
- To buy new buildings or land for business purposes.
The business resort to seasoned equity offering when they are felling short of financial resources to cover their high finance costs on the existing issued debt. It additionally resorts to such a corporate event when the business visualizes or sees a new high growth project in its pipeline. Such issues, therefore, help businesses pursue an expansionary policyExpansionary PolicyExpansionary policy is an economic policy in which the government increases the money supply in the economy using budgetary tools. It is done by increasing the government spending, cutting the tax rate to increase disposable income etc. and thereby ensure that the business grows despite facing challenges on the financial front.
Seasoned Equity Offering vs. IPO
An initial public offering is performed by the business when they are looking forward to making a foray into financial markets. On the other hand, seasoned equity issues are brought in after the initial public offering by the companies that are listed in the financial markets. The initial public offering is regarded as the first or initial attempt to raise finance from the financial markets, whereas the seasoned issues are regarded as the second attempt to raise finance from the financial markets.
The initial public offering is always visualized under positive light and carry positive sentiments to the new investors. The seasoned issues, on the other hand, are visualized under a negative impression to the existing as well as new shareholders. The reason being that such issues dilute the ownership of the existing shareholders until and unless they actively participate in such issues. For new investors, they may see it in a bad impression because they might get the feeling that the business is not performing up to the mark.
The underwriters normally handle initial public offering by offering at a new and competitive price, whereas for the seasoned issues, the underwriters normally offer shares as per the prevailing market price. Normally an underwriter can charge high floatation costsFloatation CostsThe cost incurred by a company when it issues new stocks in the market is known as flotation cost, and it involves audit expenses, legal fees, accounting fees, the investment bank's part of the issue, and the fees required to list the stocks on the stock exchange. for seasoned issues as compared with the initial public offering.
The seasoned equity offering is termed as the offering that is brought in by the blue-chip business to facilitate business expansion and growth. This is brought in after the initial public offering to raise finance for business requirements.
This has been a guide to what is Seasoned Equity Offering and its definition. Here we discuss features, examples, reasons for such an offering along. You may learn more about financing from the following articles –