TRX Inc. (Home Assignment).
The Financial Analysts
Melissa Gottschall, Jillian Marchand, Scott Duggan, Cary Konopka, Blair MacLaughlin,
Jake Baker
1) In general, what attributes make a company a good candidate for an IPO?
- Good Business History and Background: Investors will forecast future earnings off of
the historical background of the company. It will also show that your company is stable.
Many investors will be looking to hold the stock long-term, so if investors trust the
background of the company, more people will be willing to invest.
- Experienced Management: Good management can ensure that the company will make
decisions that are best for the company and to ensure profitability. Also, good
management is the basis for growth and performance. Strong management will creates a
good public image.
- Profitability: A profitable company tells investors that they will actually get a return on
their investment. It also shows potential for growth, which can lead to dividends for
investors.
- Growing Industry: A company can’t grow in a shrinking industry. In a growing
industry, the company has better potential to capture a larger portion of market share.
- Growing Company: More is better. Investors will reach their maximum utility with a
growing company. The objective is to maximize shareholder wealth. A growing company
has the best chance of reaching this goal.
2) How does TRX compare on these dimensions?
- Good Business History and Background: This company started up in 1999. This case
has 6 years of data.
- Experienced Management: The management team made a good decision to cut off low
margin products in order to focus on their more profitable operations. This is an example
of the quality of management in TRX.
- Profitability: Over the last five years, TRX has yet to turn profit, although they are
coming closer to turning a profit. Investors want to see a good Ev/ebitda enterprise value
and price to earnings, which is not good for TRX.
- Growing Industry: TRX is an internet-based company. With the majority of business
transactions being online, this industry has been steadily increasing.
- Growing Company: From 2000-2005 the company has steady growth.
3) How favorable is the market climate for the TRX IPO?
TRX operates in a very volatile market where prices for IPO’s go up and down quite
often in short periods of time. This choppy market makes it hard to initiate an IPO at the
right time. Although market returns and performance have been better than they were in
2004, the current market for the industry is soft and as always, competition is fierce,
making the supply for funds greater than the investor demand. This is the main factor
that’s preventing TRX from having much control over the issue price, especially the $11$13 per share. Also, since the market returns are currently down in the travel industry,
investors could be concerned about their investment, even at the $9 issue price.
TRX has an impressive investment banking team and support from it’s majority
shareholder to wait for the right time to issue. They are also in the middle of initiating
new cost cutting objective and getting away from customer care platforms, which provide
little return. With that said, investor demand at a better price might be more achievable if
the firm was to take on some leverage, cash out Hogg Robinson, improve performance
and wait to see if the market becomes less volatile.
4) Summarize IPO process in Canada in two pages (single space)?
The first public equity offering is known as the initial public offering. All initial public
offerings are all cash offers, which entail securities being offered to the general public at
a cash price when the company decides to go public. All companies on the Toronto stock
exchange come under the Ontario securities commission’s jurisdiction. Management
must obtain permission from the bod in order to do an IPO. The firm must prepare and
distribute copies of a red herring (preliminary prospectus) to the OSC and to potential
investors.
They’re a series of steps involved when issuing the initial public offering. The basic
procedure in Canada is as follows:
1. Management’s first step before issuing securities to the public is to obtain
approval from the board of directors. This step requires a vote of the
shareholder/shareholders. In this initial phase, the company will create or update
their business plan, select lawyers, auditors and underwriters/agents. As well as
review and strengthen internal systems, procedures, ensure that their accounting
policies and financial records are prepared for the required prospectus. This first
phase is crucial for the business to ensure that they are prepared to follow through
with their IPO objectives.
2. Once issuance of IPO is approved the firm must prepare and distribute copies of a
preliminary prospectus to the OSC and to potential investors. The prospectus
contains:
 Description of the offering
 Description of the company
 Detailed financial information
 Management Discussion and Analysis
 Detailed information on management, directors and principal shareholders
The OSC will study the preliminary prospectus and notifies the company of any
required changes. The firm must wait for approval from the OSC before
continuing with the IPO.
3. Once approval has been given, underwriters determine the price which the
securities will be sold and the security dealers can begin selling the new issue.
The proceeds from the issue are delivered to the issuing company, and their
securities are then available on the market for exchange
Underwriters are key components of IPO, they perform vital services for corporate
issuers. Initial public offerings with prestigious underwriters will perform better than
those without. The role of the underwriter involves:
1. Formulating the method used to issue the securities
2. Pricing the new securities
3. Selling the new securities
In Canada, many firms establish relationships with their underwriters. There are two
basic types of underwriting possible, regular underwriting and best efforts underwriting.
Determining the correct offering price for the IPO is the most difficult thing an
underwriter must complete.
References:
1. Jordan. B, Roberts. G, Ross. S, & Westerfield W. (2010) Fundamentals of
Corporate Finance, Seventh Edition. McGraw-Hill Ryerson Limite.
2. Gowling Lafleur Henderson, 2013. Guide to Going Public In Canada. Received
from:
http://www.google.ca/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&sqi=2&v
ed=0CCYQFjAA&url=http%3A%2F%2Fwww.gowlings.com%2FknowledgeCen
tre%2FpublicationPDFs%2FGuide%2520to%2520Going%2520Public%2520in%
2520Canada.pdf&ei=I__wUvThFIbisAScj4DABA&usg=AFQjCNEM0qZAXNu
HL-XAT3K2eL9swNK3sA&bvm=bv.60444564,d.cWc