ACADEMIC YEAR 2019-2020MSc in Finance “Netscape’s Initial Public Offering” GROUP B-3 Written by: Abel Cuadrench, David Restrepo, Ekaterina Gornostaeva, Francisco Ferreira, Sanket Lalit Bansal, Valentin HeldNovember 5th, 2019
Netscape Case Study 1 1.Describe Netscape’s business model. Does Netscape need to go public to satisfy its capital needs? What sources other than the public equity market could satisfy those needs? Comment on them. What might be its capital needs over the next 5 years? (Use assumptions in question 4 to answer). Netscape Communications Corporations is a web services company founded in 1994. They provide their clients with three product lines and generate their revenues mainly through product sales. The product line “Client software”, enables end-users to navigate the web and comprises their flagship product “Netscape Navigator”. The product line “Server Software” enables hosts to create and operate websites. Finally, “Integrated software” enables companies to conduct e-commerce. A crucial selling point of these products is their enhanced security, which is a precondition for e-commerce and online ads. Netscape generate roughly 95% of their revenues from product sales, with most revenues generated by “Netscape Navigator” and one of their three server products. Apart from product sales, Netscape generate service revenues, coming from consulting, maintenance and support services. Their operating expenses (mainly from R&D and Marketing) are very high and the business is not profitable yet. However, the potentially high scalability of their software-based business model as well as expected significant revenue growth justify the expectation that Netscape will eventually turn profitable. Regarding competition, note that at the time of the IPO, the software industry is at an early development stage. Hence, there are not many relevant competitors to the business, yet. Although, they have two main competitors in Spyglass and Microsoft. Spyglass offers a product like “Navigator” but addresses a distinctly different market. Microsoft, however, is a more powerful direct competitor, with their operating system having direct access to other companies’ services. Expected rapid and significant sales growth implicate capital needs between $31.0M and $62.1M for a five-year period. As the working capital is assumed to remain constant throughout the five-year period starting 1996, the main driver for capital needs is the increase in fixed assets, which is reflected in CAPEX. As CAPEX are assumed to be proportional to sales, it is necessary to make assumptions regarding sales growth in order to estimate CAPEX. To this end, three scenarios regarding average (annual) sales growth are considered: 50%, 60% and 70%. Assuming the CAPEX to sales ratio to be at 45.8% at the beginning of 1996 and at 10.8% at the end of 2000 leads to an average CAPEX to sales ratio of 28.3% [(45.8% + 10.8%)/2]. Appling the average CAPEX to sales ratio to the sales increase between 1996 and 2000 leads to capital need between $31.0M and $62.1M. For details, see Table 1.