Follow-On Offering

finance a la shmoop. what is a secondary offering?

okay so hangers has gone public. in an IPO that was its primary offering. hint hint.

and hangers yes well they sell hangers. well hey if Staples can do it you know [man stands in front of hangers]

why not? anyway well how'd they go public well yes it was an IPO or initial public

offering, the first offering of formerly private shares to the public. but here

we're talking about a secondary offering so what does that mean? well usually

young companies have a bunch of insiders- people like the founders and the

employees and the original investors, and everyone wants to buy a home a Porsche a

diamond-studded Fitbit ,you know whatever. and in many cases the shares of these

early companies like hangers, represent almost all of the net worth of the

insider. so understandably they want to not have all of their eggs in one basket

or one stock in this case right? well they want to diversify. that is they want [eggs in a basket]

to sell some of their shares and get cash and then go buy a home a car or buy

bonds or a mutual fund or an index fund or some other presumably safer

investment vehicle than hangers. well the rule in most cases is that insiders

cannot sell their own shares until at least six months and change after the

company has begun trading publicly. it's called the 144 a rule. write that down

actually don't write down. all right but when they do sell they generally want to

work as a team so that their shares can be placed into the hands of funds who

have demand to hold their shares awhile right> they don't want to just dump the

shares into the market crater the stock and well basically screw everyone else.

how is this important? well let's think through a process here if everyone just

hit the panic dump button at 6:31 a.m. California time, the day that they could [dump button pictured]

first legally sell shares, well odds are good that the stock price which had been

hovering nicely at $32 and 12 cents a share give or take a dime or two, would

suddenly plunge with the massive extra supply of shares,

and not a splurge in demand to meet it. so then all of a sudden the stock is at

23 bucks a share and falling and the marketplace thinks that don't know

somebody something must be wrong with this somebody must know something so we

should dump too. and then it's kind of like sympathy stock diarrhea and not a

good situation as the stock is looking at 12 bucks. so normally the investment

bank who took the company public in the first place would circle with the [bankers and investors placed in a circle]

investors who bought in and are still holding the shares of hangers and they

place more shares in their hands. and they do this in the form of what is

called a secondary offering, yes it took us a while to get there but we did, which

is largely like an IPO lite. the management team might need to meet with

a fifth or a tenth as many of the investors they met on the IPO, and just

refresh conversations as they relate to publicly available information and

guidance on how well or poorly the company is doing, then they place those

shares that is sell say 2,000 of them per person and well you know they move

on. then they place those shares and let's say there's five million of them [stack of stocks]

and they spread them around to all the mutual funds and hedge funds buying them,

and then give the insiders their cash. so now a whole new group of folks have been

given the enviable opportunity to own hangars and while the employees and

investors that have been there since day one yeah well they get to cash out at

least partly, and let's just say that for them driving to work is now a thing of

the past. [man uses laptop from bed with an empty bag of chips next to him]