Equity  Issuance  Process    

Case:  TRX,  Inc.:  Ini8al  Public  Offering  

Public  Issues  

•  Objec&ves  •  Expansion  or  debt  

refinancing  •  Divestment  

opportuni8es  •  Future  funding  •  Valuing  firm  by  public  •  Enhance  corporate  

viability  an  reputa8on  •  Enable  borrowing  •  Exi8ng  promoters  

•  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  

•  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  

•  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.  

IPO  

IPO  Process  •  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  (in  Days)     Event  

<0   Underwriter  selec8on  mee8ng.    

0  Organiza8on  “all  hands”  mee8ng.  “Quiet  period”  begins  (Management,  Underwriters,  Accountants,  Legal  Counsels)  -­‐  Plan  process  and  agree  on  specific  terms  

15-­‐44  

Due  diligence.  Underwriter  interviews  management,  suppliers,  and  customers;  reviews  financial  statements;  dra^s  preliminary  registra8on  statement.  Senior  management  underwriter  gives  ok  on  issue  

45  Registra8on  (announcement)  date.  Firm  files  registra8on  statement  with  SEC;  registra8on  statement  is  immediately  available  to  the  public  

45-­‐75  SEC  review  period.  SEC  auditor  reviews  for  compliance  with  SEC  regula8ons.  Underwriter  assembles  syndicate  and  prepares  road  show  

50   Distribute  preliminary  prospectus  (Red  herring).    

60-­‐75  Road  show.  Underwriters  and  issuing  firm  management  present  offering  to  interested  ins8tu8onal  investors  and  build  book  of  purchase  orders.    

75-­‐99   Lekers  of  comment  received  from  SEC;  Amendments  filed  with  SEC.    

99   Effec8ve  date.  Underwriter  and  firm  price  offering.  SEC  gives  final  approval  of  registra8on  statement.    

100   Public  offering  date.  Stock  issued  and  begins  trading.    

108   Seklement  date.  Underwriter  distributes  proceeds  to  issuing  firm.    

A^er  market     Underwriter  may  support  new  equity  by  ac8ng  as  market  maker  and  distribu8ng  research  literature  on  issuing  firm  

IPO  Process  •  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  

•  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  •  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  

•  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  •  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  

•  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  •  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  

•  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  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    

Es8ma8ng  the  preliminary    price  by  the  

merchant  banker  

Deciding  price  band  

Deciding  offering  price  

•  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  

IPO  Pricing  •  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.  

•  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  

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  

•  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  

•  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  •  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  

•  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  •  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  

•  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  

•  Measure  of  the  mis-­‐pricing  is  a  measure  of  failure  of  an  IPO  

•  Large  first  day  jump  cause  significant  and  inappropriate  transfer  of  value  to  subscribers  

•  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  

•  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  •  Based  on  intrinsic  value  •  Rit  =  [(pit/Pi0)-­‐1]*100  •  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  

•  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  

∑

∑

=

=

+

+= n

tmt

n

iit

it

rN

rNWR

1

1

11

11

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  

•  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  

Investors’  Precau8ons  •  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  •  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  

Capital  Raising  Op8ons  

IPO  

Private  Placement  of  

Equity  

Private  Placement  of  

Debt  

Capital  Raising  Op8ons  

IPO  

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  

Capital  Raising  Op8ons  

IPO  

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  

Capital  Raising  Op8ons  

IPO  

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  

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  

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    

Decision  

Go  ahead  with  the  IPO  at  the  lower  

price  of  $9  per  share  

Withdraw  the  IPO  and  wait  for  a  beker  8me  to  try  again  

Decision  

Go  ahead  with  the  IPO  at  the  lowest  

price  of  $9  per  share  

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?    

Decision  

Go  ahead  with  the  IPO  at  the  lowest  

price  of  $9  per  share  

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    

• 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  

SELEX    

• 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  

CORREX    

• 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  

TRANXACT    

• 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.    

DATATRAX    

• 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?  

• 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    

Another  private  placement  instead  of  an  

IPO  

• 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.    

BCD  should  just  provide  the  addi8onal  funds  necessary  to  buy  out  

Sabre  and  Hogg  Robinson  

• 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  

Mo8va8on  behind  to  pursue  the  IPO  

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  

IPOs  accompanied  by  the  sale  of  insider  shares  experience  more  underpricing  

Investment  bankers  lower  the  offer  price  to  account  for  the  informa8onal  asymmetry  created  from  what  depar8ng  shareholders  know  that  new  

investors  may  not  

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  

Therefore,  they  are  unlikely  to  agree  that  that  value  should  be  

less  now  than  when  they  invested  

They  are  less  sure  about  how  Davis  can  resolve  this  issue  

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