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Case Analysis of Netscape's
Initial Public Offering

Executive Summary

2. Background-3P
3.1. Position
The Internet Industry consists of companies that provide a wide variety of products and services primarily online through their Web sites. Operations include, but are not limited to, search engines, retailers, travel services, as well as dial-up and broadband access services. Netscape Communications is a US computer services company, best known for Netscape Navigator, its web browser. Netscape's web browser was once dominant in terms of usage share with a high market share. There are several reasons for Netscape to be successful at that time, the first one is that they come to the broad Internet market early and had the first-mover advantage being the pioneer of web browsers in the evolving Internet market. The second reason is less competition in the current market. While Netscape started their business, it had little competition in the market. The third reason: high level of innovation. The innovative products satisfy the customers’ needs and improve their firms’ brand recognition However, Netscape’s position seems to be risky because they are standing in a very competitive position. Spyglass, Microsoft and other on-line computer service providers are the main competitors at that time. Under the fierce competition, Netscape lost most of its market share to Internet Explorer during the first browser war. The usage share of Netscape had fallen from over 90-percent in the mid-1990s to less than one-percent by the end of 2006. 3.2. Product

The company’s most popular product: Netscape Navigator was a client-based web browser software application that allowed users to navigate the Internet and the new World Wide Web using a graphical point-and-click interface with text and images, similar to the Windows or Mac operating systems for personal computers.  Navigator combined many of the text-based Internet commands into an easy-to-use graphical interface and it gave rise to the term "Internet surfing".  Navigator's functions included web browsing, file transfers, news group communications and e-mail.  By making Navigator freely available, Netscape's strategy was to gain a substantial market share of the web browser market, and build brand loyalty and brand recognition, which would stimulate upsell demand for its revenue producing line of server application software. Besides, Netscape also provide service including consulting, maintenance, and support services. 3.3. Performance

Netscape had incurred total losses of %4.3 million on total revenues of $16.6 million for its first two operating quarters ended June 30, 1995. It still expected to continue to operate at a loss for the foreseeable future.

3. Assumption
(1) The cost ratios in the coming years are the same as in the current states. (2) Depreciation is held constant at 5.5% of revenues;
(3) Change in net working capital is essentially zero;
(4) Long term steady growth of 4% annually after 2005 can be used to compute terminal value; (5) Long term riskless rate of 6.75%;
(6) You can take Netscape's equity beta to be 1.5;
(7) You can take the market risk premium to be 7.5%.
(8) Consider Netscape as an all-equity company (ignore interest income expense); (9) Tax rate of 34% is applicable when the company has positive taxable income; if income is negative, no tax is paid in that year and the negative income is carried forward to offset future positive income.

4. The Problem
(1) Does Netscape need to go public to satisfy its capital needs? What would you estimate might be the magnitude of its capital needs over the next 3 to 5 years? What sources other than the public equity market could be tapped to satisfy these needs? (2) The case points out that the IPO market is sometimes characterized as a “hot issues” market and that in retrospect many IPOs are viewed as underpriced? What might explain...
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