Corporate FinanceNovember 2012The Netscape’s IPO Gulcin Askin Michelle Donovan Kivanc Ozuolmez Peter Tempelman
Question I Why has Netscape been successful to date?             What is its strategy?How risky is its current competitive...
Answer ISuccess reasons;•First Movers advantage;      • Introduced “click-and-point” browser      • Introduced the concept...
Question IIValue Netscape
Answer 2Based on researches on web, and considering industry conditionsaround 1995 – 1996, we decided to assume the averag...
Answer 2  Based on the assumptions, the free cash flow of Netscape;                                        1995           ...
Answer 2The share distribution after IPO is given in the case as below.Share Holder      PercentageClark                  ...
Question IIIHow fast does Netscape have to grow on an annual basis  over the next 10 years to justify the $28 offer price?
Answer 3The share distribution after IPO is given in the case as below.Share Holder      PercentageClark                  ...
Answer 3  When we apply the same assumptions, and look for a growth rate that  sets the NPV = $397.7M, the free cash flow ...
Question IV What sources of capital other than the public equitymarkets could be tapped to satisfy these capital needs?
Answer 4Netscape already had investors like;• Jim Clark as Angel Investor•Adobe, and 5 other media companies as Corporate ...
Question VWhat are the advantages and disadvantages of public                   ownership?
Answer 5Advantages•Greater liquidity•Better and cheaper access to capital•Better diversification for equity investors•Visi...
Question VIWhy are many IPOs underpriced?
Answer 6•     Underwriters want to control their risk•     Reward for investors for taking the risk *•     Premium on mark...
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Netscape IPO - Harvard Business Case

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  • MBA Valuation Week 1
  • Netscape IPO - Harvard Business Case

    1. 1. Corporate FinanceNovember 2012The Netscape’s IPO Gulcin Askin Michelle Donovan Kivanc Ozuolmez Peter Tempelman
    2. 2. Question I Why has Netscape been successful to date? What is its strategy?How risky is its current competitive situation?
    3. 3. Answer ISuccess reasons;•First Movers advantage; • Introduced “click-and-point” browser • Introduced the concept of “Web Surfing”•Worked on both sides of the market; Browser for Clients, E-commerce application and service for companies•Working in growing industryStrategy;•Give away today, make money tomorrow.•They gave the browser for free, and made money on the server side (by selling tocompanies)•Dominate and set the standards, build ecologyRiskiness;•Although they were a newcomer, the industry has a Equity Beta of 0.73. So theindustry was not that risky.•Bigger players like Microsoft, AOL, Prodigy were also interested in the browsersbusiness and entry barriers were not that high. Therefore, Netscape’s position in thebrowsers market was not rock solid.
    4. 4. Question IIValue Netscape
    5. 5. Answer 2Based on researches on web, and considering industry conditionsaround 1995 – 1996, we decided to assume the average growth rate as19% for Netscape.
    6. 6. Answer 2 Based on the assumptions, the free cash flow of Netscape; 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 47,086,432.39 66,679,096.91Total Revenues 33,250,782.00 39,568,430.58 56,032,854.54 79,348,125.32 94,424,269.13 112,364,880.27 133,714,207.52 159,119,906.94 189,352,689.26Total Cost of Revenues 4,389,624.00 4,115,116.78 4,896,988.97 5,827,416.87 6,934,626.08 8,252,205.03 9,820,123.99 11,685,947.55 13,906,277.58 16,548,470.32 19,692,679.68 42,189,443.42 59,744,470.83Gross Profit 28,861,158.00 35,453,313.80 50,205,437.67 71,095,920.29 84,604,145.14 100,678,932.72 119,807,929.93 142,571,436.62 169,660,009.58 17,327,807.12 24,537,907.66Research & Dvelopment 12,230,304.00 14,561,182.45 20,620,090.47 29,200,110.12 34,748,131.04 41,350,275.94 49,206,828.37 58,556,125.76 69,681,789.65 28,722,723.76 27,338,429.73Other Operating Expenses 26,933,133.42 28,093,585.71 28,576,755.82 24,597,918.85 19,829,096.52 23,596,624.86 28,079,983.58 33,415,180.46 39,764,064.75 46,050,530.88 51,876,337.39Total Operating Expenses 39,163,437.42 42,654,768.17 49,196,846.29 53,798,028.97 54,577,227.56 64,946,900.79 77,286,811.94 91,971,306.21 109,445,854.39Operating Profit/Loss (EBIT) -10,302,279.42 - 7,201,454.37 - 3,861,087.46 1,008,591.38 7,868,133.44 17,297,891.32 30,026,917.58 35,732,031.92 42,521,117.99 50,600,130.41 60,214,155.19Unlevered net income -10,302,279.42 - 7,201,454.37 - 3,861,087.46 665,670.31 5,192,968.07 11,416,608.27 19,817,765.61 23,583,141.07 28,063,937.87 33,396,086.07 39,741,342.42Interest Income 991,166.00 991,166.00 991,166.00 991,166.00 991,166.00 991,166.00 991,166.00 991,166.00 991,166.00 991,166.00 991,166.00Interest Expenses 257,310.00 257,310.00 257,310.00 257,310.00 257,310.00 257,310.00 257,310.00 257,310.00 257,310.00 257,310.00 257,310.00Interest tax shield - - - 87,485.40 87,485.40 87,485.40 87,485.40 87,485.40 87,485.40 87,485.40 87,485.40 16,072,482.83 14,981,459.49Capital Expenses 15,228,858.16 15,814,314.65 15,857,858.16 13,199,560.65 10,199,709.55 12,137,654.37 14,443,808.70 17,188,132.35 20,453,877.49Depreciation 918,000.00 918,000.00 918,000.00 918,000.00 918,000.00 918,000.00 918,000.00 918,000.00 918,000.00 918,000.00 918,000.00Depreciation tax shield - - - 605,880.00 605,880.00 605,880.00 605,880.00 605,880.00 605,880.00 605,880.00 605,880.00 - 18,281,714.29Net cash flow -23,879,281.58 -21,363,913.02 -13,452,846.45 - 8,049,150.03 - 43,610.98 11,357,397.45 13,184,828.10 15,359,470.58 17,947,295.12 21,026,806.33 Risk-free rate 6.71% Clark 24%NPV of cash flows after 2005 $296,569,905.90 Equity Premium 6.00% Kleiner Perkins 11%NPV of cash flows btwn 1995-2005 -$39,758,106.19 Equity beta 0.73 Media Companies 11%Total NPV $256,811,799.71 James Barksdale 10% Tax Rate 34% Public 44%Cost of Equity=Rf+B(Rm-Rf) 11.09%Growth rate 19.00% The market value of Netscape should be; $256,811,799.71
    7. 7. Answer 2The share distribution after IPO is given in the case as below.Share Holder PercentageClark 24%Kleiner Perkins 11%Media Companies 11%James Barksdale 10%Public 44%Based on the distribution, and our valuation in previous slide, we calculatethe share price as;$256.81M * 44% / 5M=>$22.60 per share for 5M sharesThis calculation doesn’t include under pricing discount. In order to attractinvestors, a discount should also be applied.Assuming the under pricing rate at 20%; the share price should be at $18 per share for 5M shares
    8. 8. Question IIIHow fast does Netscape have to grow on an annual basis over the next 10 years to justify the $28 offer price?
    9. 9. Answer 3The share distribution after IPO is given in the case as below.Share Holder PercentageClark 24%Kleiner Perkins 11%Media Companies 11%James Barksdale 10%Public 44%• 5M public shares, as price of $28 = $140M for 44% of Netscape.• The total equity value of Netscape is, as estimated by underwrites; $318.18M• But, as the underwriters underprice the stock price, the $28 per share doesn’t lead to a good valuation. We assume underpricing ratio is 20%. And therefore; the estimated Netscape’s market value by underwriters should be aprox $397.7M.Then question is to find the growth rate that sets the NPV of Netscape equal to $397.7M
    10. 10. Answer 3 When we apply the same assumptions, and look for a growth rate that sets the NPV = $397.7M, the free cash flow of Netscape; 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 51,043,973.71 78,358,675.97Total Revenues 33,250,782.00 41,197,718.90 63,243,483.43 97,086,399.53 120,290,049.02 149,039,370.73 184,659,780.34 228,793,467.84 283,475,106.65Total Cost of Revenues 4,389,624.00 4,284,562.77 5,308,573.27 6,577,322.28 8,149,302.30 10,096,985.55 12,510,165.10 15,500,094.56 19,204,617.16 23,794,520.66 29,481,411.09 45,735,400.45 70,209,373.67Gross Profit 28,861,158.00 36,913,156.13 56,666,161.16 86,989,413.98 107,779,883.92 133,539,276.18 165,455,163.18 204,998,947.18 253,993,695.56 18,784,182.33 28,835,992.76Research & Dvelopment 12,230,304.00 15,160,760.55 23,273,601.90 35,727,795.03 44,266,738.04 54,846,488.43 67,954,799.16 84,195,996.16 104,318,839.25 31,136,823.97 32,127,057.15Other Operating Expenses 26,933,133.42 29,250,380.42 32,254,176.55 30,096,783.85 25,260,910.29 31,298,267.85 38,778,553.87 48,046,628.25 59,529,772.40 49,921,006.29 60,963,049.91Total Operating Expenses 39,163,437.42 44,411,140.97 55,527,778.45 65,824,578.88 69,527,648.33 86,144,756.28 106,733,353.04 132,242,624.41 163,848,611.65Operating Profit/Loss (EBIT) -10,302,279.42 - 7,497,984.84 - 4,185,605.84 1,138,382.70 9,246,323.76 21,164,835.10 38,252,235.59 47,394,519.89 58,721,810.15 72,756,322.77 90,145,083.92Unlevered net income -10,302,279.42 - 7,497,984.84 - 4,185,605.84 751,332.58 6,102,573.68 13,968,791.16 25,246,475.49 31,280,383.13 38,756,394.70 48,019,173.03 59,495,755.38Interest Income 991,166.00 991,166.00 991,166.00 991,166.00 991,166.00 991,166.00 991,166.00 991,166.00 991,166.00 991,166.00 991,166.00Interest Expenses 257,310.00 257,310.00 257,310.00 257,310.00 257,310.00 257,310.00 257,310.00 257,310.00 257,310.00 257,310.00 257,310.00Interest tax shield - - - 87,485.40 87,485.40 87,485.40 87,485.40 87,485.40 87,485.40 87,485.40 87,485.40 17,423,349.99 17,605,627.32Capital Expenses 15,228,858.16 16,465,492.31 17,898,538.25 16,150,322.56 12,993,731.09 16,099,232.83 19,946,949.47 24,714,270.40 30,620,981.02Depreciation 918,000.00 918,000.00 918,000.00 918,000.00 918,000.00 918,000.00 918,000.00 918,000.00 918,000.00 918,000.00 918,000.00Depreciation tax shield - - - 605,880.00 605,880.00 605,880.00 605,880.00 605,880.00 605,880.00 605,880.00 605,880.00 - 19,957,099.83Net cash flow -23,879,281.58 -22,311,621.15 -15,407,864.26 - 9,763,712.23 - 442,190.00 13,992,085.79 16,920,491.70 20,548,786.63 25,044,244.03 30,614,115.76 Risk-free rate 6.71% Clark 24%NPV of cash flows after 2005 $431,792,888.06 Equity Premium 6.00% Kleiner Perkins 11%NPV of cash flows btwn 1995-2005 -$33,224,566.96 Equity beta 0.73 Media Companies 11%Total NPV $398,568,321.11 James Barksdale 10% Tax Rate 34% Public 44%Cost of Equity=Rf+B(Rm-Rf) 11.09%Growth rate 23.90% The growth rate of Netscape should be approx. 23.9% to satisfy $28 per share for 5M shares at IPO.
    11. 11. Question IV What sources of capital other than the public equitymarkets could be tapped to satisfy these capital needs?
    12. 12. Answer 4Netscape already had investors like;• Jim Clark as Angel Investor•Adobe, and 5 other media companies as Corporate Investors•Kleiner Perkins as Venture Capitalist FirmBefore going public, they could have contacted;•Private Equity Firms•Institutional Investors
    13. 13. Question VWhat are the advantages and disadvantages of public ownership?
    14. 14. Answer 5Advantages•Greater liquidity•Better and cheaper access to capital•Better diversification for equity investors•Visibility•Knowing market priceDisadvantages•Loss of confidentiality•Lack of ownership•Legal liability and reporting obligations•Profit sharing
    15. 15. Question VIWhy are many IPOs underpriced?
    16. 16. Answer 6• Underwriters want to control their risk• Reward for investors for taking the risk *• Premium on market uncertainty *• “Leave a good taste in investors’ mouth” * James C. Brau and Stanley E. Fawcett, Feb 2006: Initial Public Offerings: An analysis of Theory and Practice

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