Generally Accepted Accounting Principles and Netscape
Case 8: Netscape’s Initial Public Offering
1. Why has Netscape been so successful to date? What appears to be its strategy? What must be accomplished if it is to be a highly successful going concern in the long run? How risky is its current competitive position? 2. 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 those needs? 3. Why in general do companies go public? What are the advantages and disadvantages of public ownership? 4. The case points out that the IPO market is sometimes characterized as a “hot issue”’ market and that many IPOs are viewed in retrospect as having been “underpriced”. What might explain these phenomena? Should the Netscape board be concerned about underpricing? Why or why not? 5. Can the recommended offering price of $28 per share for Netscape’s stock be justified? In valuing Netscape you could use the following assumptions: (a) Total cost of revenues remains at 10.4% of total revenues; (b) R & D stays at 36.8% of total revenues; (c) Other operating expenses decline on a straight-line basis from 80.9% of revenues in 1995 to 20.9% of revenues in 2001 (this would give Netscape a ratio of operating income to revenues close to Microsoft’s, which is about 34%); (d) Capital expenditures decline from 45.8% of revenues in 1995 to 10.8% of revenues by 2001 (again close to Microsoft’s experience); (e) Depreciation is held constant at 5.5% of revenues; (f) Changes in Net Working Capital are essentially zero; (g) Long-term steady state growth of 4% annually after 2005 (which gives you the terminal value); (h) Assume that Netscape’s free-cash flows can be discounted at 12% (i) A long-term riskless interest rate of 6.71% (j) In the first few years after 1995, Netscape is projected to have a negative income (losses). These loses can be carried forward to reduce future
1. Why has Netscape been so successful to date? What appears to be its strategy? What must be accomplished if it is to be a highly successful going concern in the long run? How risky is its current competitive position? 2. 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 those needs? 3. Why in general do companies go public? What are the advantages and disadvantages of public ownership? 4. The case points out that the IPO market is sometimes characterized as a “hot issue”’ market and that many IPOs are viewed in retrospect as having been “underpriced”. What might explain these phenomena? Should the Netscape board be concerned about underpricing? Why or why not? 5. Can the recommended offering price of $28 per share for Netscape’s stock be justified? In valuing Netscape you could use the following assumptions: (a) Total cost of revenues remains at 10.4% of total revenues; (b) R & D stays at 36.8% of total revenues; (c) Other operating expenses decline on a straight-line basis from 80.9% of revenues in 1995 to 20.9% of revenues in 2001 (this would give Netscape a ratio of operating income to revenues close to Microsoft’s, which is about 34%); (d) Capital expenditures decline from 45.8% of revenues in 1995 to 10.8% of revenues by 2001 (again close to Microsoft’s experience); (e) Depreciation is held constant at 5.5% of revenues; (f) Changes in Net Working Capital are essentially zero; (g) Long-term steady state growth of 4% annually after 2005 (which gives you the terminal value); (h) Assume that Netscape’s free-cash flows can be discounted at 12% (i) A long-term riskless interest rate of 6.71% (j) In the first few years after 1995, Netscape is projected to have a negative income (losses). These loses can be carried forward to reduce future