Advanced Corporate Finance Case 29

Introduction:

TRX is a midsize technology company serving the travel and finicnial services industries. Most of TRX's transaction processing and data-integration business is behind the scenes, which makes things more complicated to investors understanding of what the company does. It also complicates how to benchmark the company against other market comparables. Although the company has had strong revenue growth they have not experience a profit.

TRX represents a smaller lesser known company that faces significant challenges in becoming known and attractive to investors. The case looks at the company from its incorporation in 1999 through the IPO decision in 2005. In addition to raising capital the case includes consideration of another motivation for going public. When the company was incorporated in 1999 they had attempted to go public but this attempt failed because of the dot com collapse. Because of the failed IPO TRX's president and CEO Trip Davis found strategic investors to raise $20 million in a note convertible into equity at $11 per share. Davis had hoped to reach certain synergies with these business partners but they just never worked out. The IPO was done in order to raise capital and to allow some of its investors a way out of the firm.

It is currently difficult to gauge investor's interest in technology IPOs. TRX's road show produces some bad news for the IPO. It appears that there is not enough interest in the preliminary file range of $11 to $13 per share. Based on the demand it would appear as though the price needs to be lowered to at least $9 per share. If the price is not lowered to $9 they will most likely not meat this offering. However, the strategic investors bought the shares at $11 per share. Therefore Davis feels as if they will not be satisfied with accepting less than what their original investment was. Therefore Davis has to make the decision as whether to proceed with the IPO at the current price, a lower price, or not do the IPO at all and wait for a later date to do the IPO.

Analysis:

There are several attributes that make a candidate a good candidate for an IPO. One of these attributes is capable management. I think that TRX currently has capable management as shown by the current revenue growth. There should be positive profits or cash flow. The company doesn't currently have positive profits. Also the company has a large amount of revenues that arise from Expedia. This creates risk because if Expedia doesn't continues to realize the same success then TRX could in turn also suffer. The industry that the company is participating in should be well positioned competitively and have barriers to entry. The industry TRX is participating in is a niche industry and it has barriers to entry. Another attribute is that the Industry should be a cyclical industry and the cycle should be at a favorable point for the company and the investors. While the travel industry is a cyclical industry it does not appear that the industry is in a good point in the cycle for TRX.

There is currently a trend towards industry consolidation. This creates a opportunity for TRX since they are a behind the scenes processor. Companies with large data processing needs are eager to outsource this activity as a means of reducing their costs. Also since TRX wants to be neutral as a business model this creates a opportunity for generating future business. Both of these reasons are reasons to believe the firm has good growth potential going forward.

The market climate for the TRX IPO has been volatile to say the least. Based on the data in Exibit 4 it shows that beginning in April the market moved upward after being down for the first quarter of the year. However, Exhibit 5 shows that this recent performance has not yet had a strong impact on the issuance of technology