Tri-Tech Computer

In April 1987, financial executives of Tri-tech Computer were meeting to determine the form of a capital issue of $200 million needed for an acquisition that would complement Tri-tech’s current business. Financing alternatives available to the company included long-term straight debt, convertible debt and common stock. Convertible debentures were of particular interest. After a recent visit to Wall Street, “converts” had been touted as overpriced (to investors) by many of the investment banks that Tri-tech had visited. There appeared to be general consensus that the demand for this quasi-equity form of debt was greater than its supply and, therefore, convertible issues were currently selling at a premium. This was attributed to strong interest from institutional investors with limitations on the amount of equity they could hold in their portfolios and their preference for convertible debentures because of the guaranteed minimum return of the coupon payment. Dick Sutton, the treasurer, began the meeting by saying he thought that convertible bonds were an expensive form of financing for a high-growth company like Tri-tech because the market would not give an appropriate premium for potential appreciation of the equity base. Doug Jenner, the assistant treasurer, had yet another concern: “We’ve got to keep in mind that investment bankers are salespeople first and financial consultants second. I don’t think of them as giving impartial advice so much as trying to sell a hot product.” The chief financial officer, Eric Stone, thought that convertibles were securities issued for companies with weak credit, but he wanted to review the analysis of each financing alternative before making a final decision.