question about ipo's

[jumpthru]

When a company makes a second IPO or follow up offering, where does that equity come from? Is the company simply saying, "we think our company is worth another $100 million" so we are going to sell $100 million worth of stock?

isn't this pulling money out of thin air? What about the investors in the initial IPO? does there value decrease?

thanks.

[Guppies]

I'm a beginner myself but I think it is common for companies to retain some of the shares of itself on an ipo. Presumedly a second offering would allow investors to purchase some of these shares that they held on to from the first offering. I.e. a company offers 50% of its shares in an ipo and retains ownership of the other 50%, a year later there is a second offering where the company sells off another 25% of the total shares meaning it still holds on to 25% of its own shares. I think this is what happens but I would appreciate if someone could verify or correct this.

[Preem]

Company directors can authorize the creation of additional shares for the purposes of additional funding.

This tends to shaft the initial investors, but if the company's survival is at stake, they do whatever is necessary.

BTW, just as a matter of terminology, it's extremely rare for a company to do a "second IPO".

The only cases, that I'm aware of, is where a company does a an IPO, then gets bought out by a private equity firm, then again goes public.

[Scorpion Man]

I really didnt want to answer this thread but the other answers are so freaking painful I feel its an affront to humankind not to. Other posters...its ok just to think to yourself "I don't know" and not respond. There is no rule forcing you to write random B.S., at least that I am aware of.

In terms of nomenclature, you don't mean "second IPO". You mean "secondary offering"...this is a public offering of stock by a company that is already public. The "I" in IPO stands for initial, meaning first...obviously if you are already public this offering ain't your first.

There are 2 types of secondary offerings -- those with primary shares (newly issued shares which increase the overall shares outstanding of a company) and secondary shares (shares already outstanding and generally owned by people or institions already -- for exampole the CEO could sell stock this way, or a venture capital or LBO backer who has a large stake). Often, an offering will have both of these kinds of shares in it.

As long as stock is sold at a good price, noone gets "hosed". In situations that do not involve distress, companies and sellers of secondary stock generally are choosing FAVORABLE times to do secondaries. It is more likely for the buyers to get a bad deal than the current shareholders.

In terms of secondary stock, nothing could be more simple. It is just like when you buy stock from anyone on the open market...but it's generally a larger block and its a better way to manage the process. In terms of new, primary stock, there is no phantom creation of equity. Think of it this way. If a company is just made up of a $100 bill and there are 100 shares, each share is worth $1. The company sells 10 more shares at $1 each. Now the company is made up of $110 and 110 shares. Still $1 each. Capiche? You are trading like for like ... cash for a share of stock worth the same amount.

[Thremp]

SM,

When you secondary offer.... If you sell out 60% of your equity, would your remaining shares comes out of your 40% of equity... I'm still confused. I know I covered this at one point in class, and will likely never use this knowledge. But I digress... I know in some VC work and other things, people have clauses that prevent them losing their equity. I think I'm just confused in general now.

[Scorpion Man]

Sorry, but you are using terms in such a way that I cannot tell what you are asking. Rephrase and I will try to answer.

[Thremp]

[ QUOTE ]
Sorry, but you are using terms in such a way that I cannot tell what you are asking. Rephrase and I will try to answer.

[/ QUOTE ]


When you create new shares where does the equity come from? Does it come from only ownership or does it dilute equity of each person who owns a share?

[Scorpion Man]

I don't know what you mean by "equity". By definition if you are giving out new ownership you are diluting others. So everyone owns less as % of the company. In return, the company has more cash. Theoretically, if stock is sold at fair value, they exactly offset, meaning there has been no change in per share values.