Moscow School of Management SKOLKOVO

Netscape’s Initial Public Offering

Mina Mousa,

Anna Puzei,

Francisco Villegas,

Executive summary

• Capitalization

• Going Public - IPO

• Netscape Initial Public Offering

• Netscape Business Valuation

Capitalization

Why to capitalize

• To increase capacity

• To expand business

• To pay debts

• For R&D

• To gain visibility

General Options to Capitalize

• A private equity transaction

• Another debt transaction

• A public equity transaction – IPO

• Joint venture with another firm

Business Valuation Methods

Economic Conditions | Financial analysis | Normalization of financial statements

Business Valuation Actors

Initial Public Offering IPO

Initial Public Offering IPO

• Increased Capital. • Liquidity. • Increased Prestige..• Valuation. • Increased wealth.

Advantages

Disadvantages• Time and Expense (13%)• Disclosure.• Decisions based upon Stock

Price. Regulatory Review.• Falling Stock Price.• Vulnerability.

The IPO Process - Actors

The IPO Process - Timeline

Netscape’s Initial Public Offering IPO

Netscape IPO @ August 8th, 1995

Netscape• Founded April 1994.• Non-profitable yet respected company.• New, Innovative Market.

IPO• Share Price -> $14• Recognized IPO Team.• Oversubscription 3.5M -> 5M• Book value $16M -> $1B

Netscape IPO – Prospectus -> $14.0

Netscape IPO - AV-> US$ 28.0

Which Business Valuation Approach ?

BACK Business Valuation Actors

Netscape IPO Results @ 1 day+

• Completely Success!!• Company new value is $2.9B aprox. (Initial $1B)

SUCCESS?

• Highest value of the day $75.0 per share• Final value of trading $58.25 per share• Browser market from 90% (1995) -> 1% (2002)

Netscape Business Valuation

Netscape Valuation

Netscape Valuation

Netscape Valuation

Netscape Valuation

Netcome onlineperformance

systemsSpyglass Uunet Netscape

price per share offered $13.00 $12.00 $17.00 $14.00 14number of shares offered $18,500,000.00 $43,700,000.00 $20,000,000.00 $47,250,000.00 3500000% of equity sold $0.28 $0.17 $0.40 $0.17Price per share offered at august 1995 $36.00 $22.00 $49.25 $46.25 28Earning per share $0.04 ($0.26) $0.39 ($0.35) 0.39Net rev $17,321,000.00 $394,290.00 5 937000 $9,084.00Net income $12,778.00 $33,647.00 $1,453,000.00 $1,509.00current assets $235,500.00 $5,564,000.00 $3,254,562.00 $6,192,629.00 34519current liabilities $789,300.00 $7,118,000.00 $1,406,727.00 $5,755,418.00 42531Working Capital (CA-CL) ($553,800.00) ($1,554,000.00) $1,847,835.00 $437,211.00 -8012Initial investments (capital expenditures) $1,027,600.00 $2,536,000.00 $208,567.00 $5,897,309.00 7618Cash flowmarket value of the company $666,789,300.00 $968,518,000.00 $986,406,727.00 $2,191,067,918.00 98042531P/E 900.00 -84.62 126.28 -132.14 71.8P/B 2.77 1.83 2.90 3.30 2.0Cash to shareholders (lets assume that it is EPS*number) $740,000.00 ($11,362,000.00) $7,800,000.00 ($16,537,500.00) ($8,524,785.00)

• The Netscape P/E ratio was predictable

Valuating high-tech rapidly growing companies

August 1995:Assumption (most possible scenario): 40% growth, r=10%, • Price according DCF-model: $41.3 • P/E (accounting method): 13. 7

(undervalue the price)

Using different methods to set the price

1994 1995 1996 (F) 1997 1998 1999 2000cash flow forecast:Revenues (forecasts) $695,871.00 $16,625,391.00 $23,275,547.40 $32,585,766.36 $45,620,072.90 $63,868,102.07 $89,415,342.89product $378,490.00 $15,580,258.00 $21,812,361.20 $30,537,305.68 $42,752,227.95 $59,853,119.13 $83,794,366.79service $317,381.00 $1,045,133.00 $1,463,186.20 $2,048,460.68 $2,867,844.95 $4,014,982.93 $5,620,976.11Cost of revenues $219,090.00 $1,735,812.00 $3,252,534.00 $4,769,256.00 $6,285,978.00 $6,285,979.00 $6,285,980.00Coeffi cient (revenues/production costs) 0.31 0.10 0.14 0.15 0.14 0.10 0.07Operating expenses $9,001,566.00 $19,564,223.00 $30,126,880.00 $40,689,537.00 $51,252,194.00 $51,252,195.00 $51,252,196.00

cash to shareholders ($8,524,785.00) ($4,674,644.00) ($10,103,866.60) ($12,873,026.64) ($11,918,099.10) $6,329,928.07 $31,877,166.89number of shares (initial) 3500000 3500000 3500000 3500000 3500000 3500000 $3,500,000.00EPS $0.20 $4.75 $6.65 $9.31 $13.03 $18.25 $25.55Discounted cash-flows (present value of the cash flow)

$7,749,804.55 $8,113,018.51 $25,126,820.77 $40,805,762.34 $45,178,972.37 ($27,568,486.93) ($155,191,399.15)

FV ($144,693,239.59) ($41.34)P/E ratio (accounting method) 13.92651662 27.82601678 22.81451097 23.72528515 28.911191 -26.75944889 2.380013833DCF Model (price) ($41.34)Annual discount rate 0.1Growth rate 0.4 earning this year/earning next yearrate of return on new investment -0.92 -0.22 -0.30 -0.28 -0.21 0.11 0.55

Netscape IPO – DCF -> US$ 28.0Exhibit TN-1 Discounted Cash Flow Valuation of Netscape Communications Corporation

Actual1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Revenues g=55% $16,625 $25,790 $40,007 $62,061 $96,272 $149,342 $231,666 $359,372 $557,476 $864,785 $1,341,497Cost of Goods Sold 10.4% 1,736 2,693 4,177 6,480 10,051 15,592 24,188 37,521 58,205 90,290 140,062Gross Profit 14,890 23,097 35,830 55,581 86,220 133,749 207,478 321,851 499,271 774,495 1,201,435

Research and development 36.8% 6,115 9,486 14,715 22,827 35,411 54,931 85,211 132,184 205,051 318,085 493,430Other operating expenses 13,449 18,284 24,362 31,585 39,370 46,138 48,405 75,088 116,481 180,691 280,297

Operating income (4,675) (4,672) (3,247) 1,169 11,440 32,680 73,862 114,579 177,739 275,719 427,708Taxes 0 0 0 0 5 11,111 25,113 38,957 60,431 93,744 145,421Net income $(4,675) $(4,672) $(3,247) $1,169 $11,435 $21,569 $48,749 $75,622 $117,308 $181,975 $282,287

Cumulative tax loss carry - $(4,675) $(9,347) $(12,594) $(11,426) 0 0 0 0 0 0 0 forward

Capital expenduture 45.8% $7,618 $10,012 $12,731 $15,404 $17,157 $16,161 $25,070 $38,889 $60,327 $93,582 $145,170Depreciation 918 1,424 2,209 3,427 5,316 8,246 12,792 19,843 30,782 47,751 74,073Change NWC 0 0 0 0 0 0 0 0 0 0 0

Free cash flows $(11,375) $(13,260) $(13,769) $(10,809) $(406) $13,654 $36,471 $56,576 $87,763 $136,144 $211,190Terminal value FCF1/(K-g) 2,745,481

Present value of cash flows $173,587Present value of terminal value $883,971Total present value $1,057,558 $ 1bil. Market Value vs. $16mil. Book Value

Current shares outstanding 32,764New shares (1995 IPO) 5,000Total shares 37,764Value per share $28.00

Assumptions

Riskless rate 6.71% Cost of revenues 10.4% of salesDiscounted rate 12.00% R&D 36.8% of revenuesGrowth rate of sales 55.12% Other operating expenses Decline to 20.9% of sales by 2001Terminal value perpetual Capital expenditures 45.8% Decline to 10.8% of revenues by 2001 growth rate 4.00% Depreciation 5.5% of revenuesChanges in net working capital 0.00%

Forecast

Harvard Extension School

Netscape Strategies

Netscape position/strategies/etc