NetscapesInitialPublicOffering

HarvardBusinessSchool9-296-088Rev.May16,1997ResearchAssociateKendallH.BackstrandwrotethiscaseunderthesupervisionofProfessorW.CarlKesterasthebasisforclassdiscussionratherthantoillustrateeithereffectiveorineffectivehandlingofanadministrativesituation.Copyright©1996bythePresidentandFellowsofHarvardCollege.Toordercopiesorrequestpermissiontoreproducematerials,call1-800-545-7685orwriteHarvardBusinessSchoolPublishing,Boston,MA02163.Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,usedinaspreadsheet,ortransmittedinanyformorbyanymeans—electronic,mechanical,photocopying,recording,orotherwise—withoutthepermissionofHarvardBusinessSchool.1Netscape'sInitialPublicOfferingAugust8,1995hadtakenanunexpectedturnforNetscapeCommunicationsCorporation’sboardofdirectors.Earlierthatmorning,thedaybeforethecompany’sscheduledinitialpublicoffering(IPO),Netscape’sleadunderwritersproposedtotheboarda100%increaseintheoriginalofferingpricefrom$14to$28pershare.ThisrecommendationcameinresponsetotheremarkableoversubscriptionforNetscape’sshares,whichhadalreadypromptedtheunderwriterstoincreasethenumberofsharestobeofferedfrom3.5millionto5million.Underthecurrentproposal,acompanywithanetbookvalueofjustover$16millionthathadyettoturnaprofit,wassuddenlyvaluedatover$1billion.TheBoardfacedapricingdilemmawithinthecontextofanextremelyunpredictableindustry.WhileitsmemberswantedtoberesponsivetoWallStreet’scurrentzeal,theyalsowantedtomakesurethatthefundamentalsofNetscapejustifiedsuchadramaticincreaseinvaluation.NetscapeCommunicationsFoundedinApril1994,NetscapeCommunicationsCorporationprovidedacomprehensivelineofclient,server,andintegratedapplicationssoftwareforcommunicationsandcommerceontheInternetandprivateInternetProtocol(IP)networks.TheseproductsenabledthegrowingnetworkofserversontheWorldWideWebtocommunicatethroughmultimedia,includinggraphics,videoandsound.Designedwithenhancedsecuritycode,thesesoftwareproductsprovidedtheconfidentialityrequiredtoexecutefinancialtransactionsandtoselladvertisementsontheInternetandprivateIPnetworks.Thecompany’smostpopularproduct,NetscapeNavigator,wastheleadingclientsoftwareprogramthatallowedindividualpersonalcomputer(PC)userstoexchangeinformationandconductcommerceontheInternet.Navigatorfeaturedaclick-and-pointgraphicaluserinterfacethatenableduserstonavigatetheInternetbymanipulatingiconsandwindowsratherthanbyusingtextcommands.Withtheuser-friendlyinterfaceasaguide,NavigatorofferedavarietyofInternetfunctionsincludingWebbrowsing,filetransfers,newsgroupcommunications,ande-mail.InitiallyshippedinDecember1994,NetscapeNavigatorgenerated49%and65%oftotalrevenuesforthequartersendedMarch31,1995,andJune30,1995,respectively.Netscape’sserversoftwareprovidedenterpriseswiththebasiccapabilitiesnecessaryforcreatingandoperatingWebserver“sites,”orplacesontheWebwhichbrowserscouldvisit.ThisdocumentisauthorizedforusebyDiWu,from1/9/2012to2/1/2012,inthecourse:FINA5502:CorporateFinance-McIntyre(Spring2012),CarletonUniversity.Anyunauthorizeduseorreproductionofthisdocumentisstrictlyprohibited.296-088Netscape'sInitialPublicOffering2Incorporatingbothbrowserandserverfunctions,thecompany’sintegratedapplicationssoftwareprogramsweredesignedtoprovideenterpriseswiththecapabilitytomanagelarge-scalecommercialsitesontheInternet.Suchapplicationsenabledtheseenterprisestoconductfull-scaleelectroniccommercethroughaseamlesssystem.Together,serverandintegratedapplicationssoftwareaccountedfor36%oftotalrevenuesinthefirstquarterof1995,and28%oftotalrevenuesinthesecond.Oftheserevenues,themajorityweregeneratedbyoneofNetscape’sthreeserverproducts,NetscapeCommerceServer.1RevenuesfromNetscape’sserverandintegratedapplicationsproductswereexpectedtoincreaseasapercentageofoverallrevenuesinthefuture.Inadditiontoproductrevenues,Netscapegeneratedservicerevenues,whichwereattributabletofeesfromconsulting,maintenance,andsupportservices.Theserevenuesamountedtoapproximately5%and7%oftotalrevenuesforthequartersendedMarch31,1995andJune30,1995,respectively.FinancialPerformanceNetscapehadincurredtotallossesof$4.3millionontotalrevenuesof$16.6millionforitsfirsttwooperatingquartersendedJune30,1995.Thecompanyexpectedtocontinuetooperateatalossfortheforeseeablefuture.Exhibits1and2provideNetscape’sfinancialstatementssinceitsincorporationinApril1994.OperatingactivitiesforthesixmonthsendedJune30,1995hadgenerated$7.3millionincash.Cashflowsfromfinancingactivitiesof$20.5millionwereprimarilyattributabletothenetproceedsof$17.3millionfromtheissuanceofSeriesCPreferredStockandborrowingsof$2.2millionunderadebtfacilityagreement.Cashusedininvestmentactivitiesof$22.1millionrelatedto$16.6inshort-terminvestmentsand$5millionincapitalexpenditures.Attheendofthesecondquarterof1995,Netscape’sprincipalsourcesofliquiditywere$8.9millionincashandthe$16.6millioninshort-terminvestments.Thecompanyexpectedtotalcapitalexpendituresfor1995ofapproximately$12million.IndustryBackgroundThedemandforNetscape’sproductshadevolvedoutofthedevelopmentoftheInternetinthelate1960s.TheInternetwasaglobalnetworkdesignedtofacilitatecommuni