Ben's IPO Syndicate Primer, Part 2

On Monday I started this series with a very basic overview of the IPO syndicate market. The reason, as I wrote earlier, was to bring those readers who are new to the equity syndicate process up to speed. Judging from the amount of email I received on that first column, I'd have to say that it was well-timed.

Today we're going to cover the basics of the secondary and follow-on markets and how they tie into the overall picture of equity syndicate. First, here's a little lingo that you'll need to know.

Remember that a company issuing stock for the first time to the public markets is doing an initial public offering (IPO). But a company that is already public and whose stock is already traded on an exchange can issue stock as well. These deals are commonly referred to as secondaries. The term secondary is only correct about half of the time, though, because there are actually two types of deals that occur when a public company increases its float via an underwritten offering -- the secondary offering and the follow-on.

A secondary offering occurs when previously issued stock is offered by one or more selling shareholders. This is done for a number of reasons, most often in the case of a large seller that wishes to liquidate a position without putting heavy downward pressure on the stock. An underwritten offering like this is a much more orderly method of selling a lot of stock, without the unwanted effect of trashing the share price.

A follow-on offering differs from a secondary in that the shares are all primary. By primary, I mean the shares have not been previously issued. These, of course, come from the company itself. Follow-ons are done to raise cash for the company's till for any number of reasons. The money may be earmarked for an acquisition or may be used to buy back and retire some of the company's outstanding debt. If you're curious, the intended use of the proceeds is almost always stated in the filing. ...