Netscape Ipo
Essay Preview: Netscape Ipo
Report this essay
It all started with the development of a graphical software program that gave rise to the notion of “surfing” (Netscapes). Netscape Communications can trace its roots to a group of science students working at the University of Illinois at Urbana-Champaign who turned a simply software program called Mosaic, into a platform that enabled non-technical computer users to access and retrieve information that was becoming more and more available on the worldwide web. Founded in 1994, Netscape Communications Corporation provides a comprehensive line of client, server and integrated applications software for communications and commerce on the Internet and private Internet Protocol (IP) networks (Netscapes). A key feature that the company incorporated into the design of its software products was the use of an enhanced security code. This code provided the confidentiality that clients demanded to sell advertisements and most importantly, execute financial transactions over the Internet.
Many young start-up companies eventually find themselves strapped for cash. Netscape would definitely fall into this category as it increasing felt the pressure and loss of market-share to a growing number of competitors. Many companies find it desirable to “go public” with an initial public offering (IPO) when their equity capital needs increase to the point where the opportunity cost of remaining private and compensating investors for the lack of liquidity becomes too great relative to the lower coat of capital derived from liquid public markets (Netscapes). Netscapes situation is somewhat unique in the fact that although its current book value was about $16 million dollars and it had yet to turn a profit, the groups lead underwriters put forth a proposal to the board of directors to double the original offering price of the stock from $14/share to $28/share 24 hours before the scheduled IPO (Netscapes). Being part of an extremely unpredictable industry, the board of directors definitely was looking to capitalize on the current favorable market that was presented by Wall Street, but did the company fundamentals justify such a dramatic increase in valuation (Netscapes)
In this case study, we will dissect exactly how the board of directors at Netscape went about addressing this precarious situation. Most importantly, we will direct our efforts to evaluate the following questions: Does Netscape need to go public to satisfy its capital needs over the next three to five years? If so, why? If not, why not? As an investor in Netscape, you were willing to buy at the original price of $14 per share. Are you still willing to buy at the IPO price of $28 per share? If so, Explain. And finally, if you were an executive at Netscape, what would you recommend with respect to the proposed offering price of $28 per share? Lets begin with the first question. Question 1: Does Netscape need to go public to satisfy its capital needs over the next three to five years? Going public is certainly one means of supplying new capital, but there are alternatives. The optimal source of capital depends upon a firms asset characteristics, the nature of asymmetric information that might exist between insiders and outside investors, and the degree and the nature of the uncertainty surrounding future returns. Possibilities include an angel; venture capita, bank loans and a strategic alliance.
The cash flow valuation shows that Netscape will continually need more capital investment in the next three to five years in order to keep the business operating at the same level of income. Despite this, Netscape was a pioneer for the Internet industry and its demand continued to increase. Netscape was facing a deteriorating loss of market share due to intense competition from various companies. In order to compete with their competitors and to gain visibility and credibility within the industry, Netscape needs to continually explore new opportunities and cutting edge technology. This will result in the intense drive to find more and creative ways to bring in capital revenues. The optimal capital structure minimizes the firms composite cost of capital and saves money for other opportunities. Therefore, the mandatory use of optimal capital structure and risk management is becoming increasingly important. Netscapes operating result in 1995 had showed the Current ration (1.45) was low, the Debt to total capital ration (0.18) was high, which compared with its competitors: Microsoft (4.17, 0.00), AOL (1.00, 0.08), and Spyglass (13.75, 0.00). More long-term debt would decrease the Current ration, and increase the Debt ration. Additionally, of Netscapes competitors were now operating as publicly held companies.
Netscape had been injected with various forms of investment capital, which included private equity investors. Continuing the same method to fund capital will further dilute Netscapes ownership. Although, Netscape had a net loss of over $4 million on total assets over $42 million, and had never declared a profit in its short operating history, there must certainly be characterized as a risky IPO. However, based on the research of Wall Street and the positive results of Netscapes road show, Netscapes underwriters had the confidence that the market demands would be enormously high, and would continual to grow. According to all of the factors we have mentioned above, by balancing the intense competitions, the business risks, the high market demand, and the costs involved, we feel confident that Netscape would gain more opportunities by going public. Question two asks, “As an investor in Netscape, you were willing to buy at the original price of $14 per share. Are you still willing to buy at the IPO price of $28 per share? Yes, we would be willing to buy Netscape at the IPO price of $14 and even up to $28 per share. We as investors realize that we would not invest in Netscape solely for their IPO attributes but in the company as a whole based on its market share. Before choosing to invest, investors need to conduct research and make an educated decision on the company itself.
Financial analysis will help us to determine Netscapes capital needs and make recommendations for the best capital structure. First, we performed a cash flow valuation by using the following assumptions (see table): ” Total cost of revenues remains at 10.4% of total revenues ” R&D remains at 36.8% of total revenues ” Other operating expenses decline on a straight-line basis from 80.9% of revenues in 1995 to 20.9% of ” Revenues in 2001 ” Depreciation is held constant of 5.5% of revenues ” Long-term steady-state growth of 4% annually ” Capital expenditures decline from 45.8% of revenues in 1995 to