Netscape Initial Public Offering Essay Example

which avoids diluting ownership. However, due to projected future losses, securing a bank loan is unlikely.

Obtaining bank financing for a company may result in an exceptionally high interest rate. Companies often choose to go public due to the significant increase in equity capital needs. The cost of staying private and compensating investors for the lack of liquidity becomes too great compared to the lower cost of capital available through public markets.

When the number of shareholders surpasses a specific limit, companies may need to disclose their financial information. This responsibility comes with expenses related to promptly providing information to investors and regulators. Consequently, companies might decide to become publicly traded in order to take advantage of the benefits that come with going public. Additionally, another motive for companies to go public is to evaluate the market value of the company.

Going public has several benefits, such as boosting the issuer's capital, offering liquidity in public markets, cutting down on financing expenses, and obtaining favorable terms from lenders. Additionally, going public enables management to retain control and make use of stock options for compensation, which can significantly increase in value and liquidity. Ultimately, going public aids in attracting and retaining high-level personnel like executives and officers.

Despite the expensive nature of going public, which includes costs like legal and accounting fees, filing fees, travel costs, printing costs, and the underwriter's expense allowance, there are also indirect costs involved. These include management's time invested in the process and dilution resulting from selling shares at an offering price lower than the market price shortly after the IPO. Additionally, going public requires revealing sensitive

information such as transactions with management, executive compensation, and previous breaches of securities laws.

In addition, the pressure to increase immediate profits can be seen as a disadvantage when a company chooses to become publicly traded. The Netscape initial public offering (IPO) is famous for being a market with high demand because early buyers of the shares experienced substantial returns. These appealing returns are achieved by either undervaluing the shares or oversubscribing them. The trend of having a market with high demand can be attributed to the immense interest in purchasing the stock, which causes the IPO price to rise from $14 to $28.

Netscape is worried about the underpricing of its stock due to the fast market growth and rising competition. The volatile and uncertain nature of the stock makes it risky, increasing the chances of it being undervalued, a common occurrence with IPOs. Exhibit 6 illustrates that similar companies have lower stock prices. Nevertheless, Netscape capitalized on their leadership position in their product and used this advantage.

However, considering the emergence of a new competitor and the inclusion of a risky position, we may regard a price of $28 as high. To evaluate the company's value, we employ the FCFF method and account for an annual decrease in other operating expenses by nearly 10% until 2001. From that point onwards, these expenses will remain constant at 20.9%. Moreover, our calculation of the WACC stands at 11.81%, utilizing Fama French data from 1990-1995. In order to justify this price, it is imperative for the company to sustain a yearly growth rate of no less than 42.6% until 2005, assuming growth initiated

at 4% after that year.

Despite the challenges and uncertainties in the market, achieving growth is a difficult task. However, we believe that Netscape should approve the increase in the IPO price of $28. It is important to consider several factors. Firstly, investors at the time had high expectations for its potential. Secondly, Netscape has shown strong performance and leadership in an industry with total revenues exceeding a billion dollars and a positive outlook. Furthermore, there is a need for funds to cover capital expenses and indications of high interest in the IPO.