Follow-on offering

A company that is already on the stock market and wants more money does not have to go through a listing again. Everything the market needs to price it already exists: a share price, published accounts, analysts who follow it. So the whole transaction can be done in days.

The company announces that it is selling new shares, usually after the market closes. Investors put in orders overnight. In the morning a price is struck — slightly below the last closing price, because a buyer taking a large amount at once expects something for it.

That discount is the cost. It is smaller than in a first listing, because there is far less uncertainty, and it is the number everybody looks at.

There is a limit on how much of this a company can do. In many countries existing shareholders have a legal right to be offered new shares first, so a company can only sell a modest amount to new investors before it has to ask its owners instead — which means a rights issue.

Three shapes, in order of speed

• A fully marketed follow-on — a roadshow of a few days, a proper document, the widest distribution. Slowest, and it usually achieves the smallest discount.
• An overnight offering — announced after the close, priced before the open. See the accelerated bookbuild.
• A registered direct or at-the-market programme — shares dribbled into the market over weeks, at market prices, which avoids a single discount entirely and takes far longer.

Primary or secondary, once more

The same distinction that runs through this whole desk. New shares issued by the company bring money in; existing shares sold by a holder do not. In a follow-on the two are frequently combined in one book, and the split is in the announcement. A deal that is mostly a large holder selling is a block with a company's name on it.

Why the announcement lands after the close

Because the news moves the price. Announcing during the session creates a period in which the market is trading on incomplete information, and the shares will fall anyway once the supply is known. Doing it after the close gives everybody the same information before anybody can act on it.

What the discount depends on

• Size relative to normal daily volume. A deal equal to twenty days' trading needs a bigger discount than one equal to two.
• Whether it is primary or secondary. Money into the business is easier to sell than money out of a shareholder's pocket.
• How well the last few deals in the sector traded. Investors price the new one against their experience of the previous ones.
• Whether a large holder has committed in advance, which converts uncertainty into arithmetic.

The dilution that is real, and the dilution that is not

In a rights issue the discount costs shareholders nothing, because they are offered the cheap shares themselves. In a follow-on to new investors it costs them exactly the discount, on the proportion of the company they no longer own. That is the honest difference between the two structures, and it is why pre-emption rules exist.

Whether it is worth it depends entirely on what the money does. A company raising at a five per cent discount to fund a project earning above its cost of capital has created value for the holders it diluted. One raising to plug a hole has not, and no amount of speed changes that.

Reading the announcement

• The use of proceeds, stated specifically. "General corporate purposes" on a large raise is the least informative sentence in equity capital markets.
• The split between new and existing shares.
• Any lock-up the company or the sellers have accepted, which tells you whether more supply is coming.
• Whether existing holders have committed, and at what level.

The signalling problem

Management knows more about the company than the market does. A rational market therefore reads an equity issue as a signal that management thinks the shares are not cheap — because a board that believed the shares were undervalued would borrow instead. This is why share prices tend to fall on the announcement of an equity raise, beyond the mechanical dilution.

Companies fight that signal with specificity: a named acquisition, a named project, a stated return. The vaguer the use of proceeds, the louder the signal.

At-the-market programmes

Instead of one sale at one discount, shares are sold into the market gradually over months at prevailing prices. There is no discount and no announcement effect, and the cost is time plus the fact that the company is a persistent seller of its own shares — which limits how far the price can rise while the programme runs. It suits issuers with a continuous need for capital and unsettles investors who dislike a permanent overhang.

The formulas above are standard textbook formulations, simplified for teaching. They explain the mechanism — they are not a valuation tool, and they will not reproduce a dealer’s price.