In previous blogs we have covered some of the basics of IPOs, the Importance of ATM Financing for Biotechs and Shelf Registrations. Today we look at a few basics of a marketed follow-on offering.

Marketed Follow-On

A marketed follow-on is a publicly announced offering that may include a short roadshow. Unlike an IPO roadshow which can take around two weeks, we typically see marketed deals that take just a few days from announcement to pricing. For example, earlier this month a company filed their S-1 and announced their deal on a Monday and priced four days later on Thursday afternoon. With a few days available, there are options for marketing the offering:

  • Quick Roadshow. With just a few days, there is a chance to go to New York, Boston and possibly the Midwest.
  • Conference Calls. With limited time and difficult logistics, it may make more sense to host a series of conference calls with investors.

The bookrunner(s) will best be able to recommend one of the strategies, or a combination of the two. The best use of your time will be based on factors such as: most recent conferences attended and 1-1 meetings; recent non-deal roadshows; and other meetings or calls with investors. The bookrunner(s) will also look at the recent trading activity to understand which investors may be the most interested in the offering.

Underwriters

Over a year ago we looked at Considerations for Choosing Investment Bank Partners. With a new offering, there is an opportunity to look at the banks from the original deal and possibly make some changes. A few things to consider:

  • Evaluate the Bookrunner(s). While your bookrunner(s) may have done a good job on the IPO, it may be time to look at their recent performance and decide whether they are the right fit for the next offering. Do they continue to be a leader in the space? Have they continued to work with you as a partner since the time of your IPO? Will this transaction be important to them? A lot can happen between an IPO and a follow-on offering, so this is a good time to evaluate the relationship and figure out what is best for you and the company.
  • Evaluate the Co-Managers. Just like you evaluate the bookrunner(s) from your IPO, this is also a chance to look at the performance of the co-managers. Keep in mind, that just because a bank participated in the IPO doesn’t mean they should automatically be involved in the follow-on.
  • Add New Bank or Banks. A follow-on offering will typically be larger than an IPO providing the opportunity to add new banks to the deal. If you worked with a smaller bank during your IPO, now may be the chance to work with a bank that has shown consistent leadership in your company’s space. It may also be a good chance to broaden your relationships with new banks.

All of the decisions listed above are important and should not be taken lightly. As with the IPO where there may have been disappointed parties who did not get to participate, be prepared for the same when it comes time to raise additional capital.

Pricing

Whereas an IPO has a price range on the prospectus to give investors a starting point to where the deal may price, a follow-on already has an actively traded stock. The S-1 will list the last reported sales price of the company stock before it filed, but it will be the next few days trading and demand that will determine the price. From here, there are several scenarios including:

  • Strong Demand from Investors. If there is strong demand (which hopefully was anticipated), there is a chance that the stock does not move drastically from the last trade listed on the S-1. In this event, many investors may end up putting in orders at the market, meaning the underwriters may price the deal at the closing bid on the night of pricing, or at a slight discount (say pricing at $10 even despite the closing bid being $10.12).
  • Weak Demand/Price Sensitive. Investors may also be more price sensitive. This can end up being reflected in the stock trading down from filing, or investors putting in limit orders. Using the $10.12 closing mentioned above, an investor may put in an order such as this:
    • 500,000 shares at 9.50
    • 250,000 shares at 9.75
    • 100,000 shares at market

It will then be up to the bookrunner(s) to figure out the appropriate price with the most demand that will allow the stock to trade successfully in the aftermarket. If there is sufficient demand at the $10 level and includes the well-known investors in the space, then the orders that come in at the $9.50 level can be ignored. On the other hand, if the demand is price sensitive then the investors may have more leverage to force a pricing at a discount to the closing bid.

One interesting scenario is where a large, existing investor chooses not to participate in the follow-on offering. It may be that they already have a full position and are unable to buy any more shares. There is also a possibility that they will be a seller after the deal prices in anticipation of increased liquidity, especially in the first few days after the deal prices.

The above are just a few things when it comes to follow-on offerings. A deal itself is a great opportunity for a company to raise money and/or for original investors to gain liquidity. When thinking about the factors and metrics for a marketed follow-on versus other fundraising means, contact us to review the options.

Tom Brennan, CFO