It all started with the development of a graphical software program that gave rise to the notion of "surfing" (Netscape's). 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 (Netscape's). 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 (Netscape's). Netscape's 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 (Netscape's). 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 (Netscape's)
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? Let's 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 firm's 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...
Please join StudyMode to read the full document