Trx, Inc: Initial Public Offering

TRX is known as a “behind the scenes” travel-processing service company. The company focused on managing travel and data processing activities for its clients so they could focus mainly on their core businesses. As it became a world-leading travel technology and data services provider, it offers services and utilities for online booking, reservation processing, data intelligence, and process automation. TRX generated revenue primarily from three service offerings: transaction processing, data integration, and customer care. In 2004 TRX increased it revenue to $113. 4 million up from $63. million. However, despite this strong growth in revenue the company still had not reported positive earnings. Trip Davis, Chief Executive Officer of TRX, Inc. was making another attempt to take the company public since 2000 after the unexpected dot-com collapse. Davis believed that the company needed to grow further to avoid the continuous losses and hence shift away from the low margin customer care business. Davis determined that it was time to raise capital to fund the future growth of the company and at the same time, he wanted to achieve a strategic recapitalization of TRX.

Davis believed there were three possible capital raising options: 1)IPO – which is defined as the first sale of stock by a company to the public 2)Private placement of equity 3)Private placement of debt **options 2 & 3 are defined as the non-public sale of bonds or securities to a chosen small number of investors Ultimately, Davis determined that the IPO seemed to be the best option for TRX. The offering proved to Davis the benefits of providing equity capital for the company and facilitating future access to the public markets, as well as offering liquidity to the minority shareholders.

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This was the option Davis chose for TRX. The U. S. technology IPO market experienced a slow start in the beginning of 2005 following a strong fourth quarter of 2004 but by May the NASDAQ began to rebound. The IPO backlog remained flat in the range of $3. 7billion to $4. 5billion, half the amount a year ago; the expectation of better market conditions ahead was one of the reasons that prompted Davis to file an S-1 for TRX in May 2005. The proposed IPO would be a total of 6. 8 million shares of common stock, 50% primary share and 50% secondary shares, with no proceeds from the sale of the secondary.

The current problem that TRX is faced with is how to carry forward with the IPO. Trip Davis hired Credit Suisse First Boston (CSFB) as the banking team to handle the IPO, however due to the weak performance of tech IPOs in early 2005, conversion of road show meetings into orders had been relatively low. Based on CSFB analysis the IPO filing range for TRX was set between $11-$13 per share. After a grueling three week long road show, Trip was contacted by his bankers who told him that the proposed file range of $11-$13 could not be achieved based on current investor demand.

The IPO offer price would need to be lowered to $9 to secure enough investors; this is well below the proposed file range. The adjustment would reduce proceeds by $10. 2 million, a 25% decrease. Davis was challenged with two options: 1. Go ahead with IPO at the lower price of $9 per share 2. Withdraw the IPO and wait for a better time Davis’s long-term strategy for TRX was to focus on the higher margin data-transaction and -integration sectors. As reported in the fall of 2004, TRX was generating double digit top-line revenue growth but was still reporting negative net income.

Relationships with the two minority investors Hogg Robinson and Sabre Investments were problematic. After raising capital from Sabre in 2001, few synergies were achieved and lack of urgency was demonstrated by them in improving TRX’s core business. TRX and Sabre came to the conclusion that it was in both parties’ best interests to sever the relationship. The relationship with Hogg Robinson on the other hand was more straightforward – it was brought in by a private equity firm and the investors wanted to exit their investment in TRX.

Faced with these challenges, Davis determined that TRX would need to raise capital to fund future growth and recapitalize the firm strategically. Davis initially considered three possible options: an IPO, a private placement of equity, or a private placement of debt. Based on the circumstances Davis believed the IPO would be the best option. Unfortunately due to the soft market, the proposed range he bargained for was not what investors wanted to pay. Typically, by definition IPOs are the first sale of stock by a private company to the public.

IPOs are often issued by smaller, younger companies seeking the capital to expand, but can also be done by large privately owned companies looking to become publicly traded. In TRX’s situation, they are looking to expand and find ways to refocus on their core business. As with most companies, TRX has a few uncertainties about the IPO. While contemplating the idea of taking a company public via an IPO, the increased capitalization for the issuing business is a strong point to consider, since a public offering creates a market value on a company’s stock.

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