Initial Public Offering

Initial Public Offering

I. STATEMENT OF THE PROBLEM

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Trip Davis, CEO of TRX Inc., has to make a decision how to raise capital in order to expand TRX’s core business and accelerate the transition away from customer care. TRX’s minority shareholders (BCD Technology, Hogg Robinson Holdings, and Sabre Investments) are looking to withdraw their investments in TRX.

II. ALTERNATIVE SOLUTIONS

1. Initial Public Offering

2. Private Placement of Debt

3. Private Placement of Equity

III. ANALYSIS OF THE ALTERNATIVES

Initial Public offering is “the first sale of stock by a 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.” The disadvantages of initial public offering include:

• Ongoing requirement to disclose financial and business information

• Meaningful time, effort and attention required of senior management

• Risk that required funding will not be raised

• Public dissemination of information which may be useful to competitors, suppliers and customers

Private Placement of debt is “the sale of a bond or other security directly to a limited number of investors; used in the context of general equities.” Private placement of debt issues is more effective than public bonds when trying to overcome problems. Firms that issue only private issues of debt usually have more problems finding information than firms that have access to the public bond market. They have to pay more for their private placements. People that used to have public placements switch to private placements when the information given in unsuitable for issuing public bonds. In general purposes financing, the people that use public placements switch to private placement when the issue size is small because it minimizes transaction costs.

Private...