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

% change in stock price after first day of trading

96%
60%
31% 27%

Netcom Online
  Comm. PSI Inc. SpyGlass Inc. Uunet Technologies

Date of IPO 14/12/1994 8/5/1995 27/6/1995 25/5/1995

Price per share
offered $13.00 $12.00 $17.00 $14.00
% change in stock
price after first day
of trading 31% 27% 60% 96%
 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