Seasoned Equity Offering

The seasoned equity offering is defined as the additional offering of shares by the business after bringing in its initial public offering in the stock markets. It is also referred to as secondary equity offering, wherein such activity is done basically to increase the capital by approaching the financial markets.

The extra shares offered by the company may be the new shares or the shares sold by the existing shareholders. The companies that offer these shares are already publicly trading to raise additional capital, thereby making it one of the most important sources of funding.

The seasoned equity offering is the offering 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 secondary issue is generally brought in by companies already listed in the financial markets. It is also regarded as the follow-on offering as it is brought after the initial public offering. The business approaches the financial markets to gather more proceeds from the market. The business that has additional issue shares is 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 a departure as they visualize such issues negatively or under a bad impression.

Other such corporate events cause the share prices to deteriorate. Under dilutive issues, the shares issue new equities to the financial markets and further finance.

The seasoned equity offering is the most sought-after source of funding because it exhibits certain traits that the other sources of financing offer.

Let us check out the traits of this form of equity offering:

• The publicly traded companies generally bring the issue.
• 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 stockholders.
• Bringing in such issues causes the value of each share to depreciate and the number of shares issued to increase.

Let us consider the following examples to understand the concept better and also see how it works:

Example #1

Let us take the example of XYZ corporation. The business is looking forward to paying its debt and raising additional finance by offering a seasoned equity issue. The business employs an underwriter to facilitate the financial transaction.

The underwriter prepares the new prospectus and registers the securities and exchange commission transaction. After accomplishing the registration, it handles the sales of securities that 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.

Example #2

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 bank, it handled the issue independently. Hence, they bore negligible floatation costs and handled their press releases and registrations. The Investment bank Goldman Sachs went public or had its initial public offering in 1999, and it brought its first seasoned issue 10 years later down the timeline.

Example #3

Let us take the example of a private investor. They 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. Therefore, such transactions do not dilute any existing ownerships.

Initial Public Offering (IPO) is the most widely used offering for companies. Still, there are firms who prefer to raise funds using the seasoned equity offers.

The business resorts to seasoned equity offerings when they are short of financial resources to cover their high finance costs on the existing issued debt. It also resorts to corporate events when the business visualizes or sees a new high-growth project in its pipeline. Such issues, therefore, help businesses pursue an expansionary policy and thereby ensure that the business grows despite facing challenges on the financial front.

Some of the common reasons behind these companies making this choice are as follows:

• To procure additional finance 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 capital.
• To pitch for mergers and acquisitions.
• To buy new buildings or land for business purposes.

Seasoned equity offering and IPO are two sources of financing or raising capital for companies. However, there are a few differences between them, which include:

• The business performs an initial public offering 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 listed companies in the financial markets.
• The initial public offering is the first or initial attempt to raise finance from the financial markets. In contrast, the seasoned issues are regarded as the second attempt to raise finance from the financial markets.
• The initial public offering is always visualized positively and carries positive sentiments to the new investors. But, on the other hand, the seasoned issues are visualized under a negative impression to the existing and new shareholders. The reason is that such issues dilute the ownership of the existing shareholders until and unless they actively participate in such issues. In addition, new investors may see it as a bad impression because they might feel 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. In contrast, the underwriters normally offer shares as per the prevailing market price for the seasoned issues. As a result, normally, an underwriter can charge high floatation costs for seasoned issues compared to the initial public offering.

When it comes to comparing seasoned offerings with the other source of offerings considered by different organizations, secondary offerings are a must to be studied.

Let us know what are the differences between these two:

• While seasoned equity offerings are additional shares offered by companies to raise their capital and obtain financing, secondary offerings are the issuance of the existing shares of the companies that shareholders may not want to retain.
• The former is the way of obtaining more funding for expanding or growing an existing business, the latter is opted for by top executives of the company so that they can sell the excess amount of shares they have.

This has been a guide to what is Seasoned Equity Offering. Here, we explain it with examples, vs IPO, vs secondary offerings, features, and reasons. You may learn more about financing from the following articles –

• Full Form of IPO
• Pre IPO
• Venture Capital Financing
• Success Fee