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Netscape Ipo Case Essay

3858 words - 16 pages

EF5052(A) INVESTMENT CASE 2

Netscape’s IPO

 

Group 7 
JU Fei  LIU Yao  LIU Yini  WU Tianyi  ZHANG Xuehui ZHANG Yiyun 
       

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Netscape’s IPO 

Brief Introduction 
Netscape Communication Corporation is going to issue its initial public offering in August 9, 1995.  It is a young but rapidly growing company which is founded in April 1994 and only operates for 15  months. Netscape is also going through losses and never gain profits. But in the time of rapidly  developing of the Internet, Netscape now had succeeded in capturing 75% of the Web browser  market  by  using  its  most  popular  product,  ...view middle of the document...

 Companies find it desirable to “go public” when their equity capital needs increase to the  point where the opportunity cost of remaining private and compensating investors for the lack of  liquidity become too great relative to the lower cost of capital derived from liquid public markets.  The  principal  reasons  for  Netscape  going  public  were  to  fund  expected  future  growth,  to  stockpile cash reserves for potential acquisitions, and to gain visibility and credibility within the  industry. And in 1995, the IPO market is characterized as a “hot issue” market. In the first half of  1995,  IPO  stock  prices  increase  on  the  first  day  of  trading  by  an  average  of  20%  and  this  outstanding  momentum  was  largely  attributable  to  venture‐backed  high‐technology  stock  offerings, particularly those related to the Internet.    Netscape’s initial capital is from Clark. In the fall of 1994, Clark invested additional $1.1 million  and the Silicon Valley venture capital firm of Kleiner, Perkins, Caufield & Byers invested $5 million.  The third round of financing in April 1995 is private placement of stock totaled $18 million.    On July 17, 1995, the investment bankers suggested offering 3.5 million Netscape shares priced at  $12‐$14  per  share.  But after  the  “road  show”,  the  response  was  overwhelmingly  favorable.  On  August 8, 1995, the lead underwriters proposed to increase the original offering price from $14  to $28 per share and the number of shares to be offered from 3.5 million to 5 million.        Before answering the related questions, I will do the valuation of the company first.   
1   

Netscape’s IPO 

DCF Valuation of Netscape’s IPO 
Assumptions (Hint Sheet and Template): 
1. In  terms  of  annual  basis,  the  data  (including  Revenues,  Cost  of  goods  sold,  R&D  expenses  and  Other  operating  expenses)  of  year1995  in the  Excel  template  is  the  double amount  of  data in the income statement for six months ended June 30, 1995 (Exhibit 1).  2. Total cost of revenues remains at 12.50% of total revenues.  3. R&D remains at 36.8% of total revenues. 36.8% is derived by dividing Revenues by R&D in  the income statement of half year of 1995. 36.8%=6,115,152/16,625,391 (Exhibit 1)  4. Other  operating  expenses  (which  already  includes  depreciation)  decline  on  a  straight‐line  basis  from  80.9%  of  revenues  in  1996  to  20.9%  of  revenues  in  2001  (this  would  give  Netscape a ratio of operating income to revenues close to Microsoft's, which is about 34%).  80.9%  is  derived  by  dividing  Revenues  by  other  operating  expenses  (total  operating  expenses  –  R&D)  in  the  income  statement  of  half  year  of  1995.  80.9%=(19,564,223  –  6.115.152)/16,625,391 (Exhibit 1)  5. Capital  expenditures  decline  straight‐line  from  45.8%  of  revenues  in  1996  to  10.8%  of  revenues  by  2001  (again,  close  to  Microsoft's  experience).  45.8%  is  derived  by ...

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