Lecture10 - TOPIC 10 CAPITAL BUDGETING AND STRATEGY READING...

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102 T OPIC 10 C APITAL B UDGETING AND S TRATEGY R EADING Supplemental handouts Chapter 8, section 8.6. Homework: Continue the homework from last time and study for the midterm. Make sure you do the practice tests before the review session. Objectives: You should be able to: Understand why a positive NPV project must have some sort of competitive advantage behind it. Think strategically about competitive advantage to weed out projects that look like they have positive NPV but really don’t Identify and explain potential biases and errors in investment analysis, especially those related to business strategy Recognize strategic options whose value NPV will miss.
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103 Bad Strategy Leads to Bad Capital Budgeting Decisions Prior to 1994, the internet was very hard to use and few people could access it Jim Clark and Marc Anderson had a vision: a user-friendly button- based browser could put everyone online Founded Netscape in 1994 to develop a web browser that anyone could use; sunk millions of their own and relatives’ money, as well as some VC money into the project In August of 1995, raise $140 million in an IPO for more investment in software development; has about 80% of the browser market Company worth $2.2 billion by the end of the first trading day; stock price closed at $58 per share; rises to a peak of $174 in December, 1995. Analysts and financial press projecting Netscape to become the way everyone browsed the internet Fast forward to today: Netscape disbanded as a company in 2003 Time Warner still owns the brand, sells some browser-related products (like Mozilla) in niche markets, but the total market share is tiny Worth a tiny fraction of what it was worth in 1995 What happened?
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104 A Monster Called Microsoft Analysts, investors, and Netscape executives in 1995 failed to anticipate the intense competition they would get from Microsoft Netscape executives explicitly stated that they did not expect any direct competition in their quest for browser market dominance In December of 1995, Bill Gates declares his intent of capturing the browser market; Netscape stock starts to tank Instead of selling out to Microsoft, Netscape tries to fight and spends millions of dollars in the process (a very bad strategy) Microsoft has all kinds of competitive advantages over the fledgling company Even an anti-trust ruling against Microsoft can’t save Netscape. By Nov. 1997, Netscape’s market share drops from 80% to 47%, and sales begin to decline; stock continues to tank; bottoms out at $18 in 1998 Sells out to AOL in Dec. of 1998; Netscape investors get about half a share of AOL stock for every share of Netscape By end of 2002, AOL (now merged with Time Warner) is worth only $13 per share!!!
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Lecture10 - TOPIC 10 CAPITAL BUDGETING AND STRATEGY READING...

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