Netscape’s Initial Public Offering
Q1. Why has Netscape been successful to date? What is its strategy? How risky is its current competitive situation?
Netscape’s most successful product was the leading client software program that allowed individual PC users to exchange information and conduct business over the internet, being the most user-friendly version of similar products.
Mid 1995, out of the 57million internet users, 8million were new that year. Internet was growing rapidly. Netscape set the industry standard with Netscape Navigator and managed to capture 75% of the market by Spring 1995 and was poised to make money by selling software to companies willing to make use of online marketing opportunities.
However, this success carried some risks with it, too, according to us. Netscape Navigator, the company’s most successful product, accounted for 65% of total revenues in Q2 2005. Server and integrated application software accounted for 28% of revenues in that quarter. Notwithstanding any other factors, deriving such a large share of your revenues from one product always carries a long-term risk with it.
Given that Spyglass Inc was Netscape’s only real competitor in 1995 (and even competing on a different market), it is beyond doubt that Netscape’s short term position in the market was excellent. However, with big giants such as Microsoft, America Online, and Progidy developing similar software and planning to enter the same market Netscape was engaging in on a 1 or 2 year term from 1995, one should have concluded that it was not very likely that Netscape would remain in its unique monopoly (or close to monopoly) position. It can be inferred from Exhibit 3 of the article that Microsoft and America Online had a far greater spending power than Netscape in 1995, adding to their chances of taking up market share in the near future.
Q2. Value Netscape.
Total Equity value
IPO Share price
1. Considering the industry is in inception phase and there is a large growth potential, a growth rate from 1995 to 2005 of 15% is assumed. 2. Assume interest expense and income stay constant over time 3. When calculating the depreciation, the additional capital expenditure is also taken into consideration and is also depreciated on 10-year straight line basis
Q3. How fast does Netscape have to grow on an annual basis over the next 10 years to justify the $28 offer price?
Under the same assumption in Q2, the growth rate should be 11.09% over the next 10 years to justify the $28 offer price (using solver).
Q4. What sources of capital other than the public equity markets could be tapped to satisfy these capital needs?
-When a private company decides to raise outside equity capital, it can seek funding from several potential sources: angel investors, venture capital firms, private equity firms, institutional investors and corporate investors.
Netscape already has :
> Jim Clark as Angel Investor
> Adobe and five other media companies as Corporate Investors and > Kleiner Perkins as Venture Capital Firm
So, it can go to Private Equity Firms and Institutional Investors before
raising public equity. Another possibility is a Joint venture with a competitor.
Q5. What are the advantages and disadvantages of public ownership?
Better access to Capital
Equity holders become more widely dispersed, making it difficult to monitor management Firms must satisfy all legal and regulatory requirements (e.g. SEC filings, SOX etc.) which is costly and time-consuming.
Q6. Why are many IPOs underpriced?
-A naive view would be that issuers have no choice because a relatively small number of underwriters control the market.
-The more commonly accepted explanation is referred to as the ‘winner’s curse’. The winner’s curse describes the effect that rationed allocation of shares for each investor has on pricing. When an IPO goes well, the demand for the stock exceeds the supply, thus allocation of shares is rationed. However, if an IPO does not go well, demand at the issue price is weak, so all initial orders are filled completely. So you only get all the shares you demanded, if the IPO is more likely to perform poorly, and you get only part of your order if the IPO went well. This effect implies that it may be necessary for the underwriter to underprice its issues on average in order for less informed investors to be willing to participate in IPOs.