Equity Issuance Process Case: TRX, Inc.: Ini8al Public Offering
Public Issues
IPO • • • • • • • • • • • • • • • •
Advantages Immediate inflow of capital Improving D/E ra8o Raising addi8onal funds in future Increased value for the company Less dilu8on Higher price for promoters exit Win customers Secure financing Expansion Effect merger or acquisi8ons Access to Capital Markets Greater Liquidity and Fair Value Transparency Greater Goodwill Exit Route for Venture Capitalists
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Disadvantages Highly expensive (17%) Risk of devolvement of the issue Absorbs large amount of 8me and energy Loss of privacy Control dilu8on Reduced flexibility Increased pressure from share holders Difficulty in maintaining good investor rela8on at regular intervals Vola8lity in stock prices Addi8onal cost as a public company Cumbersome & costly process Lack of sincerity due to separa8on of ownership Greater responsibility in providing data Promoters stand to loose control Some8mes share prices do not represent fair value of company due to vola8lity etc.
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Prerequisite Proven track records and good earnings poten8al Desirable products or services or valuable intangibles Clear sense of direc8on Sufficient market Good management team and style Strong systems Objec&ves Expansion or debt refinancing Divestment opportuni8es Future funding Valuing firm by public Enhance corporate viability an reputa8on Enable borrowing Exi8ng promoters
IPO Process • • • • • • • •
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Pre Requisites Generate credible business plan Gather qualified management team Create an outside BOD Prepare audited financial statements Performance measures and projec8ons Develop rela8onship with investment bankers, lawyers and accountants Holding Bake-‐off mee8ng with poten8al investment banks to discuss the equity issuance process with a no. of candidates before selec8ng a lead underwriter
Important characteris&cs of an underwriter Proposed compensa8on package Previous track record Analyst research support Distribu8on capabili8es A^er market-‐making support
Event 8me Event (in Days) <0 Underwriter selec8on mee8ng. Organiza8on “all hands” mee8ng. “Quiet period” begins (Management, Underwriters, Accountants, Legal Counsels) 0 -‐ Plan process and agree on specific terms Due diligence. Underwriter interviews management, suppliers, and customers; reviews financial statements; 15-‐44 dra^s preliminary registra8on statement. Senior management underwriter gives ok on issue Registra8on (announcement) date. Firm files registra8on statement with SEC; registra8on statement is immediately 45 available to the public SEC review period. SEC auditor reviews for compliance with SEC regula8ons. Underwriter assembles syndicate and 45-‐75 prepares road show 50 Distribute preliminary prospectus (Red herring). Road show. Underwriters and issuing firm management present offering to interested ins8tu8onal investors and 60-‐75 build book of purchase orders. Lekers of comment received from SEC; Amendments filed 75-‐99 with SEC. Effec8ve date. Underwriter and firm price offering. SEC gives 99 final approval of registra8on statement. 100 Public offering date. Stock issued and begins trading. Seklement date. Underwriter distributes proceeds to issuing 108 firm. Underwriter may support new equity by ac8ng as market A^er market maker and distribu8ng research literature on issuing firm
IPO Process • • • • •
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Underwri&ng Agreement / LeAer of Intent Prepared by: underwriter’s counsel generally Provides most of terms of the underwri8ng agreement Has no legal binding Described the securi8es to be sold, set forth the rights and obliga8ons of the various par8es, and established the underwriter compensa8on Not signed un8l the offering price was determined (just before distribu8on began) Both the firm and the underwriter were free to pull out of the agreement any8me before the offering date If the firm did withdraw the offer, the leker of intent generally required the firm to reimburse the underwriter for direct expenses
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Filing with SEC Solicit the commission’s approval Prepara8on of the prospectus Answers to specific ques8ons Copies of the underwri8ng contract Company charter and by-‐laws Specimen of the security Performance of “due-‐diligence” procedures Reviewing company documents, contracts, and tax returns, visi8ng company offices and facili8es, solici8ng “comfort lekers” from company auditors, and interviewing company and industry personnel
IPO Process • • •
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Forming Underwri&ng Syndicate Formed by lead underwriter Composed of a number of investment banks who agreed to buy por8ons of the offering at the offer price less the underwri8ng discount Dealers were also enlisted to sell a certain number of shares on a “best-‐efforts” basis Selling agreement provided the contract among members of the syndicate Agreement provided power of akorney to the lead underwriter, s8pulated the management fee that each syndicate member was required to pay the lead underwriter, the share alloca8ons, and the dealer reallowance or concessions Exact terms of the agreement were not specified un8l ~48 hours before selling began, the agreement did not become binding un8l just before the offering Specified a range of expected compensa8on levels. Selling agreement was structured so that the contract became binding with oral approval of the contract via telephone by the syndicate members a^er the effec8ve date
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SEC Review Process Review process started when the registra8on statement was filed and the statement was assigned to a branch chief of the Division of Corporate Finance Statement was given to accountants, akorneys, analysts, and industry specialists To “provide full and fair disclosure of the character of securi8es sold in interstate commerce Registra8on statement became effec8ve 20 days a^er the filing date If the commission found anything in the registra8on statement that was regarded as materially untrue, incomplete, or misleading, the branch chief sent the registrant a leker of comment detailing the deficiencies. Following a leker of comment, the issuing firm was required to correct and return the amended statement to the SEC. Unless an accelera8on was granted by the SEC, the amended statement restarted the 20-‐day wai8ng period
IPO Process • • •
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Book-‐Building Ac&vi&es Surveying poten8al investors to construct a schedule of investor demand for the new issue Generate investor interest, the preliminary offering prospectus or “red herring” (since the preliminary prospectus was required to have “Preliminary Prospectus” printed on the cover in red ink) was printed and offered to poten8al investors Underwriters organizing a one-‐ to two-‐week “road show” tour Road shows allowed managers to discuss their investment plans, display their management poten8al, and answer ques8ons from financial analysts, brokers, and ins8tu8onal investors in a variety of loca8ons throughout the country or some8mes abroad Place “tombstone ads” in various financial periodicals announcing the offering and lis8ng the members of the underwri8ng syndicate
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Nego&a&ng Final Offer Price and Underwriter’s Discount Nego8ated price depended on perceived investor demand and current market condi8ons (e.g., price mul8ples of comparable companies, previous offering experience of industry peers) Underwri8ng agreement was signed, and the final registra8on amendment was filed with the SEC Company and underwriter generally requested accelera8on by the SEC of the final pricing amendment, which was generally granted immediately over the telephone Offering was now ready for public sale Final pricing and accelera8on of the registra8on statement generally happened within a few hours
IPO Process • • •
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Effec&ve Day Lead underwriter confirms the selling agreement with the members of the syndicate Members of the syndicate sell shares of the offering through oral solicita8ons to poten8al investors Since investors were required to receive a final copy of the prospectus with the confirma8on of sale and the law allowed investors to back out of purchase orders upon receipt of the final prospectus, the offering sale was not realized un8l underwriters actually received payment Underwriters would generally cancel orders if payment was not received within five days of the confirma8on Underwriters o^en posted stabilizing bids at or below the offer price, which provided some price stability during the ini8al trading of an IPO
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Offering SeAlement Offering seklement or closing occurred seven to ten days a^er the effec8ve date, as specified in the underwri8ng agreement Firm delivers the security cer8ficates to the underwriters and dealers Lead underwriters delivers the prescribed proceeds to the firm Firm tradi8onally delivers an updated comfort leker from the company’s independent accountants Following the offering, the underwriter generally con8nued to provide valuable investment banking services by providing research literature and market-‐making services for the company
IPO Pricing • • • • • • • • • • • • • • • •
Factors considered in Preliminary Price by Merchant Banker Special risk factors Use of proceeds Financial and opera8ng leverage Reasons for change sin the companies financial condi8ons Principal products or services Patents Marke8ng Produc8on Management Outside director Regula8on Li8ga8on Futures earnings Cash flow from opera8ons P/E or P/CE ra8os from es8mated EPS
Es8ma8ng the preliminary price by the merchant banker
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Factors Affec&ng IPO Pricing Expected Future Profitability based on factors like income, EPS, Revenue etc. Total composi8on of Debt Underwriter’s Reputa8on Timing of Public Offer – Bullish/ Bearish Structure of Company Board Post Issue holding of Promoters Credit Ra8ng by Agencies Tendency to Under price Book Built Price/ Fixed Auc8on Price Size of the Issue
Deciding price band
Deciding offering price
IPO Pricing • • • • • • • • • • • • • •
Deciding Price Band Forecas8ng market for the scrip Nego8ated between merchant banker and issuing company Based on… Comparing with similar listed company for… Future earnings, Cash flow from opera8ons, Fundamental asset valua8ons SWOT analysis of issuing company Past and expected quarterly and half yearly earnings Overall trend in IPO market Shareholding pakern before and a^er issue Poten8al share holders upon lis8ng stocks Finding out a market-‐maker Broker and prospec8ve investor’s percep8on about company management Future of company’s product and services Company accoun8ng methods
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Deciding Price Band Based on…. Nego8a8on between company and the merchant banker Current market condi8ons Specific demand for offering at alterna8ve price levels from ins8tu8onal investors A^er market performance of the scrip Buying interest of investors – long-‐term or short-‐ term No. of shares and share holding pakern changes Net Asset Value Appraoch Total assets -‐ liabili8es = net worth value Total shareholders funds -‐ Con8ngent liabili8es = value of net worth Net worth / Total shares = net asset value per share Profit Earning Capacity Value PECV is arrived at by capitalizing the average of the a^er tax profits for three or five years.
IPO Pricing • • • • • • • •
Controller of capital issues (CCI) pricing An8-‐compe88ve pricing Always over subscribed Abolished in June 1992 Free pricing Pricing at premium Companies with good fundamentals Cause more overpricing issues
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Issues of Free Pricing Inadequate disclosure in prospectus Akrac8ve / inflated projec8ons Price rigging by promoters…. Buying shares through intermediaries Large scale buying Inflated results Rights issue announcements
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Concessional Pricing for Promoters Preferen8al allotment of shares to promoters at a discount to the market price Huge block of shares at he^y discounts at the cost of inves8ng public May have lock-‐in-‐periods Fixing Share Premium Avg. EPS from company’s projec8on is taken and mul8plied by its adjusted P/E in comparison to the industry P/E Also based on qualita8ve factors like…. Quality of management Marke8ng network Technical collabora8ons Low cost of produc8on Brand equity Other indicators using projec8ons…. Return on net worth (RONW) Return on capital employed (ROCE) Margin indicators compared with industry average and other companies are…. Gross profit margin (GPM) Opera8ng profit margin (OPM)
IPO Pricing • • •
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Alterna&ve Methods of Fixing Share Premium Based on intrinsic value.. Intrinsic value = average earning before tax ÷ (yield expected by the investors – growth in earnings in last two years) It’s a subjec8ve method… different investors expect different yield Based on share holding pakern and yield expected by different categories of investors Based on rela8on between BV to MV or market capitaliza8on to earnings in case of a listed company Based on auc8on process Investor quote their prices Half of the shares are issued on bid price and others on weighted average price of the auc8on Based on layered fixa8on of face value plus premium
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Jus&fica&on of Premium Fixa&on Based on qualita8ve and quan8ta8ve factors Qualita8ve factors… Company’s past record in consistent dividend payout and con8nuous profit making Experience of the promoters in the relevant field Company’s USP including…Marke8ng edge over compe8tors, Distribu8on network, Brand equity for products, Client’s reputa8on Company’s en8tlement to sales and income tax Industry scenario Demand-‐supply gap Awards received by company Credit ra8ng received Quan8ta8ve factors… Company’s past performance Future projec8ons P/E mul8ples based on offer price Projected earnings compared with industry average PAT, EPS, book value, Percentage growth in past years Comparison between…BV and offer price, Offer price and projected earnings High promoters stake
Legal Framework • •
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SEBI is the regulator for IPOs Disclosures and Investor Protec8on guidelines -‐ All relevant informa8on about the company is known to public before they apply to the IPOs All informa8on should be contained only in the offer document Companies and their lead merchant bankers are required to provide jus8fica8on for the issue price Promoter’s contribu8on to be atleast 20% of the issue size For IT, Media/entertainment and Telecom sector companies this requirement is relaxed to 10% In case of book-‐building process, atleast 25% to be issued to retail investors, 15% to be issued to Non Ins8tu8onal Investors The 8me for finalizing the allotment is reduced from 30 to 15 days in book-‐built issues. Shares have to be traded within 7 days of allotment Company can retain 15% over subscrip8on
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Companies allowed to offer at premium are… New companies set up by the exis8ng companies with a five year track record of consistent profitability Exis8ng private/closely held companies and other unlisted companies with three years track record of consistent profitability Exis8ng listed companies IPO can be cancelled even a^er a stock starts trading Allotments to QIB (FIIs, FIs, MFs) will be on a propor8onate basis No business rela8onship should exit between merchant banker and ins8tu8onal investor To avoid specula8ve bidding…QIBs while subscribing have to pay 10percent value of the shares they are applying for, along with applica8on.
Measuring IPO Success • • • •
Measuring… Increase in share price on the first day of trading Two-‐digit increase in share price on the first day of trading IPOs doubled share prices on day one
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Measure of the mis-‐pricing is a measure of failure of an IPO
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Large first day jump cause significant and inappropriate transfer of value to subscribers
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Market compe88veness Measuring rela8ve company value equal to or higher than industry peers Within 30 days of IPO, the company’s market capitaliza8on should be at or above the level of its industry peers For banking and financial services companies… Measured as market-‐to-‐book value of equity Industrial companies…Measured as… Market value of equity over earnings, En8ty value over EBITDA, Cash flows
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Market pricing… Less than 20% change between offering price and 30-‐day post-‐IPO market capitaliza8on Offering price reflec8ng the market value of the assets sold ensures fair compensa8on to new and old investors a^er 30 days – allowing the market 8me to fairly evaluate the assets on offer
IPO Under (Over) Pricing • • •
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Based on intrinsic value Rit = [(pit/Pi0)-‐1]*100
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1 n 1+ ∑ rit N i =1 WRit = 1 n 1+ ∑ rmt N t =1
Rit = return on stock i in period t
Pit = price of stock i in period t Pi0 = offer price of stock iRit is posi8ve = underpriced Rit is nega8ve = overpriced May also use market adjusted return… A Rit = Rit – Rmt Where Rmt = [(pmt/Pm0)-‐1]*100
Based on wealth rela&ve indicator
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N = total number of IPO’s in the sample rit = Rit/100 rmt = Rmt/100 WRit >1 …..the IPO has outperformed the market in that period WRit <1 …..the IPO has underperformed the market in that period
Informa8on asymmetry between exis8ng and new investors can lead to under pricing
Investors’ Precau8ons • • • • • • •
Merchant banker try to price the deal so that the opening premium is about 15 percent IPO investors should be quality conscious in likle-‐known names Lis8ng gains are not guaranteed IPOs registered losses on debut trading would have had low subscrip8on level (less than 6 8mes) Its beker to divest the exposure in IPOs by the end of the first month from debut trading Investors would be beker off inves8ng in much less-‐hyped IPOs Pick IPO stocks from the sector which out performs the market
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Generally fixed price offers pay more return than the book built prices Do not buy an IPO stock during first few (5 to 6) months a^er lis8ng Promoters money may be routed through foreign funds to create a hype on the IPO through over subscrip8on levels… Hedge funds entering IPO for making a quick profit at the 8ming of lis8ng FIIs act desperately on the lis8ng day Foreign funds would not hold stocks if they do not get a pre-‐defined-‐quan8ty of shares
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IPO Scams Cornering IPO shares reserved for retail investors by applying in small quan88es through thousands of ‘benami’ or fic88ous names Shares were transferred through a series of off-‐ market transac8ons to financiers 24 key operators have indulged in abusive prac8ces in respect of 21 IPOs Depositories to block the securi8es in demat accounts of investors 8ll lis8ng MF pays only 10% of investment upfront while applying Short-‐term capital gain tax is not there on mutual selling on lis8ng, but for an individual investor has to pay the tax MF can apply for more no. of IPOs MF get beker allotment, becoz 5% shares are reserved for ins8tu8onal investors Applying through MF is simpler than yourself applying with long applica8ons
Popular Empirical Findings • •
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Over-‐subscrip8on is higher in book-‐built offerings than in fixed price offerings Use of book-‐building instead of the fixed price mechanism reduced under pricing from 77% to 34% Older firms are easier to value; these were sold at lower levels of under pricing Reduced uncertainty regarding the net roceeds from an IPO that used book-‐building approach Aggregate money raised through IPO's improves when past market returns are posi8ve List price is strongly dependent on offer price and subscrip8on
IPO Capital Raising Op8ons
Private Placement of Equity Private Placement of Debt
IPO
Capital Raising Op8ons
Private Placement of Equity Private Placement of Debt
To Davis, the IPO seemed the best op4on An IPO would be an important milestone for TRX Offering would provide equity capital and facilitate future access to the public markets Offered liquidity for exi4ng minority shareholders Lead to a beFer alignment of his stakeholders In October 2004, Davis and TRX management met with investment banks He selected the technology banking team from Credit Suisse First Boston (CFSB) to lead the offering Davis and major shareholders from BCD Technology had developed a close rela4onship with CSFB since TRX’s incorpora4on in 1999, and both par4es were familiar with each other More importantly, CSFB had strong analyst coverage in the online travel and data-‐transac4on sectors, which Davis believed would help investors understand TRX’s business model Three co-‐managers were also selected to assist in the public offering: Thomas Weisel Partners LLC; Legg Mason Wood Walker, Incorporated; and SunTrust Capital Markets, Inc. Choosing a co-‐underwri4ng team was important because it allowed the company to increase its research coverage and reach a larger investor audience
IPO
Capital Raising Op8ons
Private Placement of Equity Private Placement of Debt
Ideally, the underwri4ng banks should bring complementary skills and a diversified investor client base In this case, each bank brought a unique set of competencies—Thomas Weisel was known for its aggressive sales and trading effort, while Legg Mason and SunTrust had a wide investor client base in the central and southern United States While Davis was pleased to have a strong team on board, CSFB’s research reported a choppy market for IPOs in 2004 The NASDAQ market had trended down in 2004, reaching a low in August 2004 before making a strong recovery in the final two quarters of the year These broader market condi4ons were mirrored in the terms of IPOs For two consecu4ve months from July to August 2004, pricing was poor as technology IPOs experienced a –17.6% and –23.8% decline in the file price to offer price in those months In September and October 2004, however, the pricing environment improved as the IPOs issued in July and August traded up (“offer to current price”) With an improving climate, Davis and CSFB made tenta4ve plans for an IPO filing in March 2005 Following a strong fourth quarter in 2004, the U.S. technology IPO market experienced a difficult start to 2005, causing Davis and TRX to push back the company’s IPO filing
IPO
Capital Raising Op8ons
Private Placement of Equity Private Placement of Debt
By May, the NASDAQ began to rebound Further, the U.S. technology IPO backlog remained flat in the range of $3.7 billion to $4.5 billion The backlog, which was a measure of pending supply, was half the $9 billion to $10 billion of a year ago, when IPO giants such as Google (with $1.9 billion in proceeds) had gone public Hope was that firming market condi4ons would facilitate an IPO issue in the second half of 2005 With the expecta4on of beFer market condi4ons ahead, Davis decided to officially start the IPO process On May 9, 2005, TRX filed an S-‐1 registra4on statement with the U.S. Securi4es and Exchange Commission (SEC) for a proposed IPO of 6.8 million shares of common stock TRX agreed to sell 3.4 million primary shares; the remaining 3.4 million shares were secondary shares TRX would not receive any proceeds from the sale of secondary shares Those proceeds would go instead to the selling shareholders, Hogg Robinson and Sabre, which were selling 2.131 million and 1.239 million shares to the public, respec4vely
Decision When Davis returned to Atlanta at the end of the road show, he got a call from two managing directors of the Global Technology Group at CSFB
Go ahead with the IPO at the lower price of $9 per share
From the book-‐building results, CSFB concluded that the proposed file range of $11 to $13 per share could not be achieved with current investor demand
Decision Based on their experience, the final IPO offer price would need to be lowered to $9 per share to secure enough investors
Below-‐the file-‐range adjustment would reduce the company’s expected IPO proceeds by $10.2 million, a 25% decrease
Withdraw the IPO and wait for a beker 8me to try again
Go ahead with the IPO at the lowest price of $9 per share
Decision
Withdraw the IPO and wait for a beker 8me to try again
Would allow TRX to raise capital (albeit less than originally expected) to support growth and accelerate the transi4on away from customer care Challenge would come from the two selling shareholders, Hogg Robinson and Sabre How would they respond to the lower price? The revised price of $9 per share was lower than the price they had paid for their shares in November 2001 Lack of agreement to proceed at the lower price could poten4ally block the IPO He had placed calls to both par4es to discuss the situa4on and was prepared for difficult conversa4ons How likely were they to agree to the $9 price? What op4ons existed if they said no?
Go ahead with the IPO at the lowest price of $9 per share
Decision
Withdraw the IPO and wait for a beker 8me to try again
Would allow TRX 4me to grow and complete the exit from the customer-‐care business before the next IPO aFempt With an increased focus on higher-‐margin businesses, some of TRX’s opera4onal uncertainty would be reduced Davis believed the valua4on of the company would become more favorable Davis also knew his majority shareholder (BCD Technology) was pa4ent and would allow him to make the best decision In the interim, though, he would have to find a way to cash out Hogg Robinson, whose inten4on to exit was most pressing Bankers at CSFB waited anxiously to hear back from him If Davis decided to proceed with the IPO, the pricing mee4ng would commence aper the close of trade that day, and the alloca4on process of new shares would begin in earnest
TRX Products and Services RESX
SELEX
CORREX
TRANXACT
DATATRAX
• An online corporate booking tool that is offered through a Web-‐based interface for business travelers and corporate travel managers, enabling the client to arrange airline, vehicle, and hotel reserva8ons • Notable RESX clients included Carlson Travel Group, Adelman Travel Group, Intel Corpora8on, and World Travel BTI
• An online reserva8on technology pla•orm that allowed travel agents and customer care representa8ves to make travel reserva8ons, process service requests, and manage customer profiles in a real-‐8me customer service environment • SELEX was a Web-‐based interface that provided access to traveler profiles and behavior data, corporate travel policies, and interoffice communica8ons • SELEX was used by large travel agencies and their designated customer-‐service providers • Notable clients included American Airlines, Expedia, and ebookers
• Transac8on processing pla•orm enabling efficient, automated quality control, file finishing, and electronic 8cke8ng of travel reserva8ons • CORREX processed all transac8ons for leisure and corporate travel that are booked on-‐line and off-‐line by agents • The so^ware enabled such systems as seat assignment, low-‐fare searches, travel upgrades, and alternate-‐ route searches • CORREX also managed all electronic 8cke8ng, including e-‐8cket issuance, e-‐mail no8fica8on and communica8on, and pretrip repor8ng • CORREX was hosted by TRX and managed by clients • Notable CORREX clients included American Express, Boeing, Carlson Wagonlit Travel Inc., Expedia, and WorldTravel BTI
• Transac8on processing pla•orm providing transac8on seklement, excep8on handling, document distribu8on, and back office accoun8ng • TRANXACT managed transac8on processing and fulfillment ac8vi8es for travel agencies, airlines and non-‐air suppliers • TRANXACT handled mul8ple ac8vi8es for our clients including exchanges, refunds, waivers and split payments, commission management, fare loading, document distribu8on, debit memo processing, back office hos8ng, and seklement and client repor8ng • TRANXACT was hosted and operated by TRX on behalf of its clients, which included American Airlines, ebookers plc, Expedia, lastminute.com plc, and Opodo.
• An integra8on pla•orm enabling the aggrega8on, enhancement, extrac8on, and repor8ng of transac8on data • DATATRAX consolidated data records from a variety of sources, including credit card issuers, credit card networks, back office travel systems, hotel suppliers, airlines, and GDSs, and normalized the records into a common structure in a single data repository • DATATRAX also enabled enhancement of data records with more detailed transac8on data from other sources, increasing the value and u8lity of the data to the clients • DATATRAX clients included Bri8sh Airways PLC, Ci8bank, Ford Motor Company, Lockheed Mar8n
TRX offered five major business solu4ons to manage transac4on processing and data integra4on for its clients TRX generated its revenue by providing these solu4ons and charging a fee on a per-‐transac4on basis As TRX solu4ons become more integrated in the clients’ end-‐to-‐end business processes, it increased the transac4on volume and, in turn, generated more revenue
NASDAQ Market and Travel Industry Performance
Selected Financial Data (in Thousands, Except for Per-‐Share Data)
Selected Financial Data (VCS)
Balance Sheet Information
Pricing Informa8on on Recent IPOs (July 2004 -‐ June 2005)
U.S. Technology IPO Backlog (July 2004 -‐ July 2005)
Principal and Selling Shareholders
Summary comparable Company Analysis
($ in Millions, Except Per Share Values)
Summary of Financial Projections
TRX's Road Show Summary Schedule
Akributes of Good IPO Candidate Company • Capable management • Strong revenue growth • Posi8ve profits or cash flow • High and sustainable growth prospects • Appropriate financial structure • Opera8onal stability and clarity • Ability to quickly scale opportunity • Well understood use of proceeds • Reasonable valua8on
Industry • Well posi8oned compe88vely— barriers to entry, unique product or service, etc. •Posi8ve industry dynamics—wave of innova8on, changing technology or consumer preferences • In a cyclical industry, at a favorable point in the cycle
Market condi4ons also contribute to investor interest in IPOs
Beker Alterna8ve to IPO? Another private placement instead of an IPO BCD should just provide the addi8onal funds necessary to buy out Sabre and Hogg Robinson
Mo8va8on behind to pursue the IPO
• Will allow 8me for TRX to exit the customer-‐care business • Given the issues that arose with Sabre and TRX’s goal of independence, it is unlikely that Davis will want to raise funds from another industry player • Raising money from a financial buyer also poses difficul8es • For one, TRX’s majority shareholder, BCD Technology, is described as pa8ent and taking a long-‐term view • Raising money from financial buyers could create a conflict between their 8me horizon and that of BCD
• Even a^er the IPO, BCD will retain a 53% stake in the company • Not only would BCD have to pay off the $20 million note, but also provide the addi8onal monies that would have been raised in the IPO to facilitate TRX’s growth • It is unlikely that BCD will want to increase its already sizable stake in the company to this extent.
• Maturity on the conver8ble note was November 2006, a likle more than a year from July 2005 • At that point, either the note had to be paid off or the minority shareholders would convert and become shareholders in TRX • Given the poten8al conflicts between Sabre and TRX, Davis was not eager to have Sabre as a TRX shareholder—especially one where without a liquid market, it would become a long-‐term shareholder or could sell its shares to someone of its choosing • Apart from an IPO, nego8a8ons regarding Sabre’s exit from TRX were likely to be difficult • The IPO provided a transparent means to facilitate the removal of Sabre
Strategic Reposi8oning of the Company and the use of the IPO as an Exit for Minority Shareholders Affect the Akrac8veness of the IPO
IPO may have been TRX’s best choice given the dual goals of raising funds and liquida8ng its minority shareholders
Proceeds of the sale of primary shares go to the company, whereas the proceeds of the sale of secondary shares go to Sabre and Hogg Robinson
Investment bankers lower the offer price to account for the informa8onal asymmetry created from what depar8ng shareholders know that new investors may not
IPOs accompanied by the sale of insider shares experience more underpricing
Even in a situa8on where management believes the departure of minority shareholders is beneficial to the firm, convincing investors of that may prove difficult
Recommenda8on
Hard that Sabre and Hogg Robinson will agree to an IPO price below the $11 they paid for their shares in Nov 2001
From the perspec8ve of when they invested in Nov 2001, TRX has made substan8al progress as a company
They are less sure about how Davis can resolve this issue
Therefore, they are unlikely to agree that that value should be less now than when they invested
Opinions will vary widely, from withdrawing the IPO and raising capital from other private investors, to possibly proceeding with the IPO if a way can be found to resolve the issue with Sabre and Hogg-‐Robinson
