Netscape’s Initial Public offering

Netscape’s Initial Public Offering

Group Member:

Jiajia Xing

Shuyuan Zhang

Chengyang Tang

Jiejun Li

1. Why are investors excited about Netscape? What is Netscape’s business model? What must Netscape accomplish if it is going to be successful in the long run? What are the risks Netscape faces?

The investors were excited about Netscape’s IPO due to two major reasons. Firstly, most of companies’ stock prices skyrocketed on the date of their IPO, and there is an average of 20 percent increase in the IPO stock price on day one in the first half of 1995. During that period of overheated IPO market, Investors had strong incentive to purchase a company stock when market opened in the morning on the IPO date, hoping to receive a high rate of capital return in a short term. Secondly, Netscape created a web browser that not only had a user-friendly interface, but also did not require users to possess a certain amount of related knowledge to access Internet. At that point of time, the browser created a huge market and many technology companies in the Silicon Valley believed that Netscape will have an outstandingly positive future.  Those expectations convinced investors that Netscape’s stock will keep increasing.

        Netscape Communications Corp. provides a comprehensive line of client, server, and integrated applications software for communications and commerce on the Internet and private Inter Protocol (IP) networks.

To be successful in the long run, Netscape should maintain its competitive advantages in the industry and successfully finance its expansive operating activities. Additionally, the company needs to keep updating its current product or developing other new product to keep the pace of the development of technology.

        Below are the risks that Netscape faces:

• Threat of new entrants; many large companies, including Microsoft, tried to enter this new industry with their own produce.
• Stability of the stock market; the overheated stock market may calm down sooner or later; the declined stock price may impose various business risk to the company.
• The development of technology; the technology industry evolves fast. Netscape’s operation is heavily depending on the current product. Once the current product is replaced by more updated technology, the company may go bankruptcy.

1. What/who have been the past sources of capital for Netscape and how much capital did they provide?

• Clark (and management of Netscape) : $2.4 million one-time fee for the rights to certain Mosaic code, and $3 million in seed money. Clark himself contribute additional $1.1 million in 1994; ownership percentage 24%;
• Kleiner, Perkins, Caufield & Byers: $5 million; ownership percentage 11%;
• Adobe System and five other media companies: ownership percentage 11%
• This final private placement of stock totaled $18 million and was orchestrated by Morgan Stanley.

1. What is the ownership structure at the time of the IPO (who are the primary owners)? Why do the ownership shares not correspond to the initial investments (the ratio of initial investment to ownership share is not the same for each investor)?

At the time of IPO, Clark, Kleniner Perkins, and the group of media companies owned the largest stakes of Netscape’s equity at 24%, 11%, and 11%, respectively. The company’s president and CEO, James Barksdale, held shares amounting to 10% of the total equity.

The ownership shares do not correspond to the initial investment because they invested in the company at the different point of time. After the establishment of Netscape, the valuation of the company kept increasing. Consequently, when investment banking and social media companies invested, the valuation of the company already exceeded the 3 million seed money plus the copyright. The risk posed to Clark was much higher comparing to later investing companies, thus Clark should have the largest stakes in the Netscape.