Netscape IPO Case Study
Case Study 2: Netscape’s IPO
February 17, 2015
Executive Summary Netscape was founded in 1994 and it provided internet applications for communications and commerce. In 1995, Netscape decided to raise capital by initial public offering. Although initial price for shares was at first $14, underwriters suggested increase the price to $28 one day prior to the initial public offering. The board of Netscape was not sure of the high price and fell in dilemma because the firm didn’t have a long track record and IT industry was not easy to predict. Other than initial public offering, Netscape could raise capital from debt and private stock offering, or from angel investors. But going public seemed to be the best option to take advantage of due to its liquidity and accessibility. It was calculated that in order to justify the price of $28 per share over 10 years, Netscape’s revenues must have grown by 44% every year. If the price were $14, the growth rate should be 35%, price of $54, it was 54%. While grown rate of 44% seems to be high level of growth, it can be frequently observed in IT industry. The average annual revenue growth rates were 37% for Microsoft(1990-1999), 78% for Amazon(1997-2006), and 41% for Google(2004-2013). They are all IT industry companies but comparing Netscape with those companies directly has some problems because the product and market condition is quite different. IPOs are often underpriced because underpricing lowers risks, guarantees a positive return for investors, helps future business, and rewards the trustworthy investors. HPR of Jim Clark, Kleiner Perkins, and Media companies were 32,932.95%, 12,314.88% and 3,348.58%. Annualized HPR of Jim Clark, Kleiner Perkins, and Media companies were 2,650.42%, 4,633.19% and 19,623.55%.
1. What risks did Netscape face in 1995? In 1995, Netscape decided to issue their initial public offering. They needed more capital for future growth, and
February 17, 2015
Executive Summary Netscape was founded in 1994 and it provided internet applications for communications and commerce. In 1995, Netscape decided to raise capital by initial public offering. Although initial price for shares was at first $14, underwriters suggested increase the price to $28 one day prior to the initial public offering. The board of Netscape was not sure of the high price and fell in dilemma because the firm didn’t have a long track record and IT industry was not easy to predict. Other than initial public offering, Netscape could raise capital from debt and private stock offering, or from angel investors. But going public seemed to be the best option to take advantage of due to its liquidity and accessibility. It was calculated that in order to justify the price of $28 per share over 10 years, Netscape’s revenues must have grown by 44% every year. If the price were $14, the growth rate should be 35%, price of $54, it was 54%. While grown rate of 44% seems to be high level of growth, it can be frequently observed in IT industry. The average annual revenue growth rates were 37% for Microsoft(1990-1999), 78% for Amazon(1997-2006), and 41% for Google(2004-2013). They are all IT industry companies but comparing Netscape with those companies directly has some problems because the product and market condition is quite different. IPOs are often underpriced because underpricing lowers risks, guarantees a positive return for investors, helps future business, and rewards the trustworthy investors. HPR of Jim Clark, Kleiner Perkins, and Media companies were 32,932.95%, 12,314.88% and 3,348.58%. Annualized HPR of Jim Clark, Kleiner Perkins, and Media companies were 2,650.42%, 4,633.19% and 19,623.55%.
1. What risks did Netscape face in 1995? In 1995, Netscape decided to issue their initial public offering. They needed more capital for future growth, and