Perfect Model Case Study On Netscape

Netscape strategy is based on the concept of giving free browsing software to non-technical users. Once Netscape acquires a large base of users, it would make money by selling commercial software to corporations that want market access to its large base of users. For this strategy to be successful in the future Netscape should be able to woo not just users rapidly but also organizations who are willing to pay to access the users and conduct their transactions easily and securely. Without a critical mass of users organizations will be reluctant to buy Netscape software and services, and without the organizations to provide revenue, Netscape will not be able to finance its operations.
Netscape has had three rounds of financing and it is likely that some investors may want to unlock their value or may not be in a position to provide additional funding. However, Netscape can still raise capital privately without going public. But since Netscape is a young growing company it may need more funding than it can easily raise from private equity. I would estimate the capital needs for Netscape over the next 3-5 years to range between $200 million to $700 million.
In retrospect many IPOs seem underpriced because underwriters and most advisers rely heavily on the company financial performance both recent and projected. There is no accurate way of measuring the market sentiment or the investors’ interest in a particular share. When investors’ sentiment about the share is highly favorable, the share prices of those shares tend to rise rapidly once they start trading making one to conclude the IPO was underpriced. Furthermore, most underwriters prefer to fix an IPO price that will avoid an under subscription. Underwriters will prefer to fix a price that will appreciate gradually once the share starts trading and thus are biased to fix the IPO price at a slight discount to what they believe is the shares intrinsic value. The board should be concerned about under pricing because it will lead to unnecessary dilution of the wealth and control of the current shareholders.
Given the assumptions, Netscape would be having an operating margin of 26.6% on all its revenue. Taking the risk free rate as the investor minimum rate of return, Netscape earnings per share would have to be $1.88. This means that the revenue for Netscape would have to increase by 61% annually over the next ten years to reach $232,216,521. At that revenue the expected operating profit would be $62,001,811.
As an executive of Netscape I would agree with the proposal to raise the price from $14 to $28 because looking at all competitors that had recently concluded their IPO the share prices increased by between 27% and 96% on their first trading day. AS an executive I would urge the board to accept the proposal in order to realize higher value for the current shareholders. As an investor, I would still buy the shares even at the increased price though I know the potential for quick gains on the first few trading days may have reduced, the share price would increase overtime. As a manager of a mutual fund I would buy and hold the shares of Netscape in order to benefit from high capital gains the shares will earn as the stock price increases over time.