What is Seasoned Equity Offering?

Explanation

This secondary issue is generally brought in by companies 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.read more. It is also regarded as the follow-on offering as it is brought after the initial public offeringInitial Public OfferingAn initial public offering (IPO) occurs when a private company makes its shares available to the general public for the first time. IPO is a means of raising capital for companies by allowing them to trade their shares on the stock exchange.read more. The business approaches the financial markets to gather more proceeds from the market. The business that has 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.read more 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.

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Features

  • 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.read more 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 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.read more.Bringing in such issues causes the value of each share to depreciate and the number of shares issued to increase.

Examples

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 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.read more 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.read more 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 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.read more, 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.

Reasons for Seasoned Equity Offering

  • 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 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)“read more.To pitch for mergers and acquisitionsMergers And AcquisitionsMergers and acquisitions (M&A) are collaborations between two or more firms. In a merger, two or more companies functioning at the same level combine to create a new business entity. In an acquisition, a larger organization buys a smaller business entity for expansion.read more.To buy new buildings or land for business purposes.

Need

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 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.read more and thereby ensure that the business grows despite facing challenges on the financial front.

Seasoned Equity Offering vs. IPO

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 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.read more for seasoned issues compared to the initial public offering.

Conclusion

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 has been a guide to 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 –

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