Netscape's Ipo
Executive Summary
Netscape Communications Corporation is often credited with launching the dot-com era and technology boom of the late 1990 's and making the Internet and World Wide Web (WWW) common household terms and services. This era is coined the "Information Revolution", since the Internet and WWW was integrated into our modern culture and society during that time. In 1995, Netscape, an early leader and innovator in the Internet and WWW software and web browser market, had been going through the initial public offering (IPO) process. Specifically, on August 8, 1995, Netscape 's lead IPO underwriters recommended to the Netscape board to increase the initial offering price to $28 per share from $14 per share, a 100% increase. At this new offering price, the firm 's value would be $1 billion, raising many eyebrows since their 1995 revenues to date were only $16 million, the firm was only 16 months old, and they had not yet shown a profit. The question remained: what was the required yearly revenue growth rate to support a firm value of $1 billion and the IPO price of $28 per share?
A net present value analysis was performed for the time period 1995-2005 using current 1995 income statement and balance sheet data for Netscape. Pro forma cash flow projections were made through 2005, and a terminal growth rate of 4% was used for 2005+. A discount rate of 12% was employed to discount the future cash flows to present day. Other assumptions were made on capital expenditures, depreciation, operating expenses, research and development (R&D) expenses, and cost of revenues to be similar to Microsoft as a proxy. The net result was that a yearly revenue growth rate of 50.89% was required to support the firm value of $1 billion and the IPO price of $28 per share.
Significant concerns for Netscape moving forward are the sustainability of their business model and competition. Microsoft has plans to release the new Windows 95 operating system with an
Netscape Communications Corporation is often credited with launching the dot-com era and technology boom of the late 1990 's and making the Internet and World Wide Web (WWW) common household terms and services. This era is coined the "Information Revolution", since the Internet and WWW was integrated into our modern culture and society during that time. In 1995, Netscape, an early leader and innovator in the Internet and WWW software and web browser market, had been going through the initial public offering (IPO) process. Specifically, on August 8, 1995, Netscape 's lead IPO underwriters recommended to the Netscape board to increase the initial offering price to $28 per share from $14 per share, a 100% increase. At this new offering price, the firm 's value would be $1 billion, raising many eyebrows since their 1995 revenues to date were only $16 million, the firm was only 16 months old, and they had not yet shown a profit. The question remained: what was the required yearly revenue growth rate to support a firm value of $1 billion and the IPO price of $28 per share?
A net present value analysis was performed for the time period 1995-2005 using current 1995 income statement and balance sheet data for Netscape. Pro forma cash flow projections were made through 2005, and a terminal growth rate of 4% was used for 2005+. A discount rate of 12% was employed to discount the future cash flows to present day. Other assumptions were made on capital expenditures, depreciation, operating expenses, research and development (R&D) expenses, and cost of revenues to be similar to Microsoft as a proxy. The net result was that a yearly revenue growth rate of 50.89% was required to support the firm value of $1 billion and the IPO price of $28 per share.
Significant concerns for Netscape moving forward are the sustainability of their business model and competition. Microsoft has plans to release the new Windows 95 operating system with an
References: [1] "Netscape 's Initial Public Offering", Harvard Business School, Case # 9-296-088, May 16, 1997. [2] A. Ljungqvist, "IPO Underpricing", Handbook in Corporate Finance: Empirical Corporate Finance, Volume A, (Handbooks in Finance Series, Elsevier/North-Holland), Chapter 7, 2006.