MFIN : Financial Instruments Professor: Bill Carlile

Case Study TRX, INC INITIAL PUBLIC OFFERING February 14, 2011

Treasure Island Team 10

Yunyun Xu Ashmita Srivastava Steve Lambe Petr Khalfen Fred Patet Kenji Yamamura

Treasure Island Team 10 Yunyun Xu, Ashmita Srivastava, Steve Lambe, Petr Khalfen, Fred Patet Kenji Yamamura

1. In general what attributes make a company a good candidate for an IPO? Growth Visibility Unique, Thematic Disruptive Profitable Inflection Point in Model Operating Leverage Large Growing Market Scalability Solid Management Team 2. How does TRX compare on these dimensions? Growth TRX has net loss since 2000. The only growth we can see is the revenues that increased from 58 million in 2000 to 109 million in 2004. The growth average for the five years is 13.61%. Visibility It is low since the TRX is a behind the scenes travel-processing service company. Need to educate the investors to invest in TRX. Unique, Thematic There were no comparing companies directly with TRX and the strong growth travel industry was a good theme to follow TRX. However, the segment back office which TRX is in was not really attractive segment for the investors. Disruptive Even though TRXs strength was its ability to automate and engineer travel and travel-related processes; the uniqueness was somewhat dampened by the fact that the company is so behind the scenes and has little recognition. Profitable Not very strong, since TRX has no positive earnings since 2000 and CSFB, the leading IB, shows lower profit projection $10.7 million in 2006, than TRXs profit projection $12.6 million in 2006. The fact that they have no direct competitors and offer a streamlining process for other big businesses does bode well for TRXs future financials though.

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Treasure Island Team 10 Yunyun Xu, Ashmita Srivastava, Steve Lambe, Petr Khalfen, Fred Patet Kenji Yamamura

Inflection Point in Model Weak. First, TRX has no profit yet and we cannot see strong reasons that TRX will turn in black in the future. Second, the Sabre investment had been a mistake. Operating Leverage TRX could achieve economies of scale by aggregating transaction volume. It could increase amount of earnings power as the company grows the top line. However, one of the three services, customer care, Large Growing Market The travel industry is one of the largest global industries totaling nearly $400 billion in 2004. According to UNWTO, the International Tourism Receipts from 2000 to 2005 was $481.6 billion and 682.7 billion respectively. The average of the growth rage was 6.6%. There was an increased willingness to outsource noncore back office business functions because of the growth in online access and lowcost carriers. However, due to the terrorist attacks of September 11, 2001 and rising fuel costs, the travel industry had experienced some serious headwinds. Scalability Strong. The financial situation of TRX is strongly tied to the overall health of the travel industry and because of the Internet technology; it is easier to see the trends from the data. Solid Management Team Davis had five years business experience after graduating from business school and he planed to spinoff the WTT entity with the WTP executives. In addition, three co-managers were also selected to assist in the public offering 3. How favorable is the market climate for the TRX IPO? Very difficult. Because of unexpected bad event, Hurricane Katarina slammed into New Orleans and one week later and Delta and Northwest Airlines declared bankruptcy, most of the investors were not interested in TRX but the industry situation, even the overall market was rising. 4. How does the strategic repositioning of the Company and the use of the IPO as an exit for minority shareholders affect the attractiveness of the IPO? The attractiveness of the IPO is very strong. For the company, having more opportunities to raise capital from the market is attractive.

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Treasure Island Team 10 Yunyun Xu, Ashmita Srivastava, Steve Lambe, Petr Khalfen, Fred Patet Kenji Yamamura

For the minority shareholders, to have more liquidity to sell their share is attractive. 5. Estimate a preliminary range for TRX's shares. An attempt at using the Gordon growth model to give a per share value of TRXs future cash flows proved to be difficult and most likely very skewed due to a number of factors. These factors include the fact that TRX is still a young and growing company that has not yet been profitable, this means certain components of the financial statements such as capital expenditures needed for growth are very hard to project and have a large influence on the ultimate outcome of the valuation based on the Gordon growth model. Using this model though, and the estimates for years 2005-2007 provided by management and CSFB with a 5% terminal growth rate, a 15% discount factor, and 17.7 million shares outstanding estimates a per share price of $21.28. This number holds very little validity for a company of this maturity. Using a P/E calculation method we calculate a price of -$3.50 for 2005 estimates and $13/share based on 2006 estimates. The 2005 price/share is negative because both management and CSFB are projecting a net loss for that year. Using an EV/EBITDA calculation method and pegging the price to the multiple observed by TRXs primary competitors (15x) we calculate a price per share of $8.83 based on 2005 projections. This is a similar price point to what CSFB recommended. Based on the above projections it seems CSFBs recommendation of $9 is in the right range.

6. Given the situation Davis faced in 2005, what would you recommend that he do with respect to the offering? There are two concerns. One is TRXs need of raising capital for the future growth. And this would be solved by (1) IPO, (2) a private placement of equity, or (3) a private placement of debt. IPO will give more opportunities to TRX to raise capital or funds by issuing new shares or issuing debt. The other concern is the problem of two minority shareholders. This would be solved by (1) IPO, (2) acquisition, (3) buying by the management of TRX. The most realistic option is IPO. The two
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Treasure Island Team 10 Yunyun Xu, Ashmita Srivastava, Steve Lambe, Petr Khalfen, Fred Patet Kenji Yamamura

minority shareholders can sell their shares anytime with some conditions. They can wait to sell until the stock price increased or they can sell it even the stock price is bellow than their buying price. Liquidity is the most important factor for exit. If TRX decided to stay as a private company, the two shareholders will have less liquidity and opportunities to sell their share and TRX will still need to care about them.

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