ECM Ch.7 — Follow-on Offerings: ABB, Block Trades, and Rights Issues

ABB (Accelerated Book Building) is the sale of a large share block to institutional investors in the window between market close and the next day's open — typically within 12–24 hours. The key: a 3–5% discount to market price in exchange for speed.

For investors, ABBs are attractive opportunities: a chance to buy a large, liquid block at 3–5% below market. For IB, however, there is real risk — if demand is insufficient, the bank must take unsold stock onto its own books, and any overnight price decline becomes the bank's loss.

Samsung C&T block trade case: when large PE funds need to unwind major stakes, ABB is a common mechanism. Dumping trillions of won worth of shares onto the open market would crater the price — an overnight book build that distributes stock across institutional investors minimizes price impact.

PE funds cannot exit immediately after a portfolio company lists. The IPO lock-up period — typically 6–12 months — prevents it. After lock-up expiry, PE funds sell their stake in stages — selling everything at once would trigger an overhang-driven price collapse.

Overhang is the market anxiety caused by the presence of a large block holder: 'that supply could hit the market at any time.' When a PE fund holds more than 30% of a company, buyers become cautious, creating sustained downward price pressure. Announcing a predictable exit schedule or executing distributed block sales are the joint tools PE and IB use to resolve the overhang.

PE funds have four main exit paths: ① IPO — highest premium but 18+ months. ② ABB / block trade — overnight or hours, but 3–5% discount. ③ Strategic sale (M&A) — potentially the highest price but regulatory review risk. ④ Secondary — selling the stake to another PE fund.

A rights issue raises capital by giving existing shareholders the right to purchase new shares at a discount proportional to their current holdings. If they exercise the rights, their ownership percentage is preserved. If they don't, they are diluted.

A general cash offering opens subscription to any institutional or retail investor. The discount is lower (5–10% vs. 20–40% for a rights issue) and the timeline is shorter (2–5 days vs. 3–6 weeks), but existing shareholders have no priority and are diluted if they don't participate.

An ATM (At-The-Market) program enables continuous small-scale share sales. The company automatically sells small amounts whenever the stock is above a target price, steadily accumulating capital during price-stable windows. Widely used by US tech and biotech companies.

The global follow-on market totals approximately $600B annually. North America accounts for ~42% ($250B), followed by Europe ($180B), Asia-Pacific ($130B), and Emerging Markets ($40B).

US market characteristic: the WKSI (Well-Known Seasoned Issuer) framework. Companies with a market cap of $750M+ and adequate disclosure history can issue shares at any time without pre-registration with the SEC. This dramatically accelerates follow-on execution for large US tech and biotech companies.

Korean market characteristic: the Bonus Issue (무상증자) culture. A bonus issue transfers retained earnings to paid-in capital without raising new money, effectively lowering the stock price to improve liquidity. Since there is no actual value change, it is often used as a short-term stock price management tool rather than genuine capital raising.