EF5052(A) INVESTMENT CASE 2
JU Fei LIU Yao LIU Yini WU Tianyi ZHANG Xuehui ZHANG Yiyun
52752084 52815259 52750804 52748187 52700026 52738944
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.
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 ...