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Netscapes Initial Public Offering

Mina Mousa,
Anna Puzei,
Francisco Villegas,
Moscow School of Management SKOLKOVO

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


Advantages

Disadvantages

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

Time and Expense (13%)


Disclosure.
Decisions based upon Stock
Price. Regulatory Review.
Falling Stock Price.
Vulnerability.

The IPO Process - Actors

The IPO Process - Timeline

Netscapes 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 ?

Company

Date of IPO

Price per
share offered

Netcom Online Communication Services


Performance Systems International
Spyglass
Uunet Technologies

12/14/94
5/8/95
6/27/95
5/25/95

$13.00
$12.00
$17.00
$14.00

% Change in stock
st
price after 1 day
of trading
+31%
+27%
+60%
+96%

Prize per share


on August 8,
1995
$36.38
$22.00
$49.25
$46.25

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

The Netscape P/E ratio was predictable

price per share offered


number of shares offered
%
of equity
soldoffered at august
Price
per share

$13.00
$18,500,000.00
$0.28

performance
systems
$12.00
$43,700,000.00
$0.17

1995
Earning per share
Net rev
Net income
current assets
current liabilities
Working Capital (CA-CL)
Initial investments (capital
expenditures)
Cash flow
market value of the company
P/E
P/B
Cash to shareholders (lets
assume that it is EPS*number)

$36.00
$0.04
$17,321,000.00
$12,778.00
$235,500.00
$789,300.00
($553,800.00)

$22.00
($0.26)
$394,290.00
$33,647.00
$5,564,000.00
$7,118,000.00
($1,554,000.00)

$49.25
$0.39
5 937000
$1,453,000.00
$3,254,562.00
$1,406,727.00
$1,847,835.00

$46.25
($0.35)
$9,084.00
$1,509.00
$6,192,629.00
$5,755,418.00
$437,211.00

34519
42531
-8012

$1,027,600.00

$2,536,000.00

$208,567.00

$5,897,309.00

7618

$666,789,300.00
900.00
2.77

$968,518,000.00
-84.62
1.83

$986,406,727.00
126.28
2.90

$2,191,067,918.00
-132.14
3.30

98042531
71.8
2.0

$740,000.00

($11,362,000.00)

$7,800,000.00

($16,537,500.00)

($8,524,785.00)

Netcome online

Spyglass

Uunet

Netscape

$17.00
$20,000,000.00
$0.40

$14.00
$47,250,000.00
$0.17

14
3500000
28
0.39

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

2000

$695,871.00
$378,490.00
$317,381.00
$219,090.00

$16,625,391.00
$15,580,258.00
$1,045,133.00
$1,735,812.00

$23,275,547.40
$21,812,361.20
$1,463,186.20
$3,252,534.00

$32,585,766.36
$30,537,305.68
$2,048,460.68
$4,769,256.00

$45,620,072.90
$42,752,227.95
$2,867,844.95
$6,285,978.00

$63,868,102.07
$59,853,119.13
$4,014,982.93
$6,285,979.00

$89,415,342.89
$83,794,366.79
$5,620,976.11
$6,285,980.00

(revenues/production costs)
Operating expenses

0.31
$9,001,566.00

0.10
$19,564,223.00

0.14
$30,126,880.00

0.15
$40,689,537.00

0.14
$51,252,194.00

0.10
$51,252,195.00

0.07
$51,252,196.00

cash to shareholders
number of shares (initial)
EPS
Discounted cash-flows (present
value of the cash flow)
FV
P/E ratio (accounting method)
DCF Model (price)
Annual discount rate
Growth rate
rate of return on new
investment

($8,524,785.00)
3500000
$0.20

($4,674,644.00)
3500000
$4.75

($10,103,866.60)
3500000
$6.65

($12,873,026.64)
3500000
$9.31

($11,918,099.10)
3500000
$13.03

$6,329,928.07
3500000
$18.25

$31,877,166.89
$3,500,000.00
$25.55

$7,749,804.55

$8,113,018.51

$25,126,820.77

$40,805,762.34

$45,178,972.37

23.72528515

28.911191

-26.75944889

2.380013833

-0.28

-0.21

0.11

0.55

cash flow forecast:


Revenues (forecasts)
product
service
Cost
of revenues
Coefficient

($144,693,239.59)
($41.34)
13.92651662
27.82601678
22.81451097
($41.34)
0.1
0.4
earning this year/earning next year
-0.92

-0.22

-0.30

($27,568,486.93) ($155,191,399.15)

Netscape IPO DCF -> US$ 28.0


Exhibit TN-1 Discounted Cash Flow Valuation of Netscape Communications Corporation
Actual
1995
$16,625
1,736
14,890

1996
$25,790
2,693
23,097

1997
$40,007
4,177
35,830

1998
$62,061
6,480
55,581

6,115
13,449

9,486
18,284

14,715
24,362

22,827
31,585

35,411
39,370

54,931
46,138

85,211
48,405

Operating income
Taxes
Net income

(4,675)
0
$(4,675)

(4,672)
0
$(4,672)

(3,247)
0
$(3,247)

1,169
0
$1,169

11,440
5
$11,435

32,680
11,111
$21,569

73,862
25,113
$48,749

Cumulative tax loss carry forward

$(4,675)

$(9,347) $(12,594) $(11,426)

Capital expenduture 45.8%


Depreciation
Change NWC

$7,618
918
0

$15,404
3,427
0

$17,157
5,316
0

$16,161
8,246
0

$25,070
12,792
0

$38,889
19,843
0

$60,327
30,782
0

$93,582
47,751
0

$145,170
74,073
0

Free cash flows


Terminal value FCF1/(K-g)

$(11,375) $(13,260) $(13,769) $(10,809)

$(406)

$13,654

$36,471

$56,576

$87,763

Present value of cash flows


Present value of terminal
value
Total present value

$173,587

Revenues g=55%
Cost of Goods Sold 10.4%
Gross Profit
Research and development 36.8%
Other operating expenses

Current shares outstanding


New shares (1995 IPO)
Total shares
Value per share

$883,971
$1,057,558

$10,012
1,424
0

$12,731
2,209
0

Forecast
1999
2000
2001
2002
2003
2004
2005
$96,272 $149,342 $231,666 $359,372 $557,476 $864,785 $1,341,497
10,051
15,592
24,188
37,521
58,205
90,290
140,062
86,220
133,749
207,478
321,851
499,271
774,495
1,201,435
132,184
75,088

205,051
116,481

318,085
180,691

493,430
280,297

114,579
177,739
275,719
38,957
60,431
93,744
$75,622 $117,308 $181,975

427,708
145,421
$282,287

$136,144

$ 1bil. Market Value vs. $16mil. Book Value

32,764
5,000
37,764
$28.00

Assumptions
Riskless rate
Discounted rate
Growth rate of sales
Terminal value perpetual
growth rate
Changes in net working
capital

6.71%
12.00%
55.12%
4.00%

Cost of revenues
R&D
Other operating expenses
Capital expenditures
Depreciation

10.4% of sales
36.8% of revenues
Decline to 20.9% of sales by 2001
45.8% Decline to 10.8% of revenues by 2001
5.5% of revenues

0.00%

Harvard Extension School

$211,190
2,745,481

Netscape Strategies

Netscape position/strategies/etc