Netscape IPO: The birth of the internet

bubble

Manu V-76

Mridul AG-78

Sahil P-89

Company Background

• Founded in April, 1994

• Had a line of Client, Server and integrated applications software

• Used in communication and commerce over the Internet and private IP networks

• Most popular product – browser Netscape Navigator generated maximum revenues

• Incurred total losses of $4.3 million in first two quarters ending June30,1995

Financing Options

Young rapidly growing companies facing intense competition typically raise equity capital in two broad ways.

• Through private equity transaction

• Going Public (IPO)

Reason for Netscape’s IPO

• Growth: Raise capital - Investments too large to be provided by the founders

• Enter Global competition – Acquisitions become more feasible

• Increase visibility – (e.g. listing on the NYSE)

• Transparency - Increase the accountability of the firm and improve the reputation by reducing information asymmetry

• But by far the biggest underlying reason was Dot Com Hot Air.

Initial offer & the road show

Underwriters Morgan Stanley and H&Q issued a preliminary prospectus suggesting offering 3.5 million Netscape shares priced at $12-$14

The IPO team went for a “roadshow” making presentations to potential investors in 20 cities talking to about 2,000 institutional investors.

The response was overwhelmingly favorable, leading underwriters to suggest offering 5 million shares at double the initial price.

The Board’s Decision

• The Netscape Board members had to determine the appropriateness of the proposed increase in price.

• They felt a need to increase the price

– Hottest IPO of the year

– Enthusiasm on Wall Street because of a new dotcom industry coming up

– Potential demand for Netscape’ s shares from Road show

• But they were also wary of the Regeneron case which increased the price only to be met with a lukewarm response by the market leading to discounted market price.

Prior dot com IPO’s

31% 27%

60%

96%

 Netcom Online

Comm. PSI Inc. SpyGlass Inc. Uunet Technologies

Date of IPO 14/12/1994 8/5/1995 27/6/1995 25/5/1995Price per share offered $13.00  $12.00  $17.00  $14.00 % change in stock price after first day of trading 31% 27% 60% 96%

% change in stock price after first day of trading

Rationale for Price increase

• Balance sheet of IT companies need not contain large amount of fixed assets as their main assets are its employees.

• Losses were not significant as they also included R & D costs which were quite substantial and can now be capitalized globally.

• Diversification- Businesses other than the server were also going strong

• Revenue Growth- The company’s revenue for six month ending June 2005 was approx. 24 times the revenue for previous nine months.

The birth of the internet bubble

• Netscape shares opened at $28.

• By the end of the trading day, they were going for $75.

• The five-million-share IPO was oversubscribed by 100 million shares.

• Even though Morgan Stanley underwrote the deal, its asset management group got only 6,000 shares.

• Netscape Chairman James Clark made some $500 million on the day

Book Value of $16 million was transformed into market value of a billion dollar!

But…

• Loss of market share - Microsoft Explorer took over

• Revenue loss and lay offs affected investor confidence

• 2000 Dot Com Bubble burst

Decline of Netscape

Netscape Today

• By the end of 2006, the usage share of Netscape browsers had fallen, from over 90% in the mid 1990s, to less than 1%.

• Netscape stock traded between 1995 and 2003, subsequently as a subsidiary of AOL.

• However, it became a holding company following AOL's purchase of Netscape in 1998 for $4.2 billion.

• The Netscape brand is still extensively used by AOL.

THA K YOU