Submitted by: Submitted to:Animesh Raj Dr. Yogesh MaheshwariPGP I, Section: E Finance-I (Oct-Dec 2013)

Brief Case Analysis 3 December 12, 2013

Netscape’s Initial Public Offering

The Case: Understanding how a corporate issues securities

The Company: Netscape Communications Corporation was founded in April, 1994, and was one of the pioneers in the era when Internet was evolving as a revolutionizing phenomenon. Netscape came up with a broad portfolio of digital products, which had great utility and were very user friendly as well. Netscape Navigator was the flagship product and generated more than 50% of its revenue. With its products which were simple to use and understand, Netscape brought Internet to the masses and gave rise to the notion of “surfing on the internet”. Netscape followed the “give away today and make money tomorrow” strategy, and soon became the industry leader in the area of web browsers. Even though Netscape had become hugely popular, it had yet to make any money when it decided to go for an IPO.

The Issue(s): The board members of Netscape had to take a final call on whether they should change the offering price of the IPO from $14 to $28 per share, as per the recommendation of the underwriters.

The Analysis: Internet was becoming hugely popular in the mid 1990’s and Netscape was one of the major contributors to simplifying the web for the masses and bringing it to the households for common usage. Netscape had an array of products in its portfolio, and had already become the leader in the area of web browsers. In order to keep up with the broad vision of its creator, Andreessen, and sustain with its “give away today and make money tomorrow” strategy, Netscape needed a substantial amount of capital.

Exhibits 4 and 5 show that several companies had successfully gone public in the years 1990-1995, and had seen a gain in their valuations on the first day of trading. Exhibit 6 suggests that Internet-related IPOs were seen in favourable light by the investors and the stock prices of some of these companies had skyrocketed after they were issued to the public. Also, the competitors of Netscape, AOL and Microsoft had a desirable equity beta of around 0.72 (as per exhibit 3), and therefore Netscape would also have been expected to have an equity beta on similar lines which would have attracted investors. Witnessing the favourable trend Netscape decided to raise money through an IPO.

One of the primary concerns in this case is that Netscape was relatively new in the business, and was still to gain a sizable foothold in the industry. The web browser, Netscape Navigator, had huge potential but it was yet to be seen whether Netscape had the ingenuity to form a sustainable business model out of it. It is worth noting that at the time when Netscape was going public, it had a net book value of only $16 million and was still making losses. Also, the potential competitors of Netscape were giants like Microsoft who were certain to come out with web browsers of their own in the near future.

Therefore, a high valuation of $28 per share does not seem justified considering the fundamentals of the company. Recently, IPOs of Facebook and Twitter also saw such unreasonable valuations based only on their future potential with no supporting business model to justify the valuations.