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INVESTMENT BANKING

Individual Assignment 2

Faculty : Prof. Sanjay Shanbhag

Submitted by:
Aakash Ladha
2015065
Section B

1. Why has Netscape been so successful to date? What appears to be its strategy? What must be
accomplished if it is to be highly successful going concern in the long run? How risky is its current
competitive position?

Ans Netscapes success may be attributed to many factors:


a)
b)
c)
d)

User-friendly click-and-point' browser


Web-surfing
Working on both sides of the market
Growing industry
Netscape's strategy

a) Give away today, Make money tomorrow


b) The software is distributed for free to anyone who has the technical means of retrieving it
electronically
c) Netscape makes money by selling server software to companies that wanted marketing access
to potential consumers
d) Aim is to dominate the market and set the industry standard
Competition and continued success
a) The number of competitors in the market has increased as the internet community has
increased over time
b) Spyglass Inc was one of Netscapes nearest competitors
c) Sought to compete with Netscape by capturing the corporate market.

Increased competition puts Netscapes current position at risk and thus products and services must
continue to satisfy the ever-changing demands of the market

2. Does Netscape need to go public to satisfy its capital needs? What would you estimate might be
the magnitude of its capital needs over the next 3 to 5 years? What sources other than the public
equity market could be tapped to satisfy those needs?

Ans Netscape needs to finance is activities to compete with other competitors. It also
needs to further develop and consolidate its technology sector to improve their competitiveness.
Estimation of capital needs
g = (19 564 223-9 001 566)/(9 001 566) = 1.1734 (4 d.p.)

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Cash in 3 years = 9 001 566 x (1 + g)^3 = $92 416 958.83
Cash in 5 years = 9 001 566 x (1 + g)^5 = $436 556 784.4
Thus, the magnitude of its capital needs over the next 3 to 5 years is between c$92 416 958.83 and $436
556 784.4.
Sources than the public equity market
a) Private equity transaction
b) Borrow from bank or raise corporate debt
c) Joint venture with a competitor

3. Why, in general, do companies go public? What are the advantages and disadvantages of public
ownership?
Ans Companies go public because they want to accumulate its cash reserves for possible mergers and
acquisition to further expand its market share and widen its clientele. Also, to use the cash obtained
from going public to settle any short term debt obligations.
Advantages of Public Ownership
a) Greater liquidity
b) Better access to capital
Disadvantages of Public Ownership
a) Equity holders become more widely dispersed, making it difficult to monitor management
b) Firm has to satisfy all of the requirements of public companies (e.g. SEC filings, SOX etc.)

4. The case points out that the IPO market is sometimes characterized as a hot issue market, and
that many IPOs are viewed in retrospect as having been underpriced. What might explain these
phenomena? Should the Netscape board be concerned about underpricing? Why or why not?
Ans Underpricing is attributed to a range of factors:
a) Information asymmetry between uninformed investors and informed investors.
b) Underwriters seek to control their risk whilst rewarding investors for taking on the risk
c) Control Theories: underpricing shapes the shareholder base
d) Behaviour Theories assumes irrational investor behaviour
e) Managerial Conflict Theory increase the number of shareholders in the company
Concerns about underpricing
a) Money left on the Table represents a cost to the firm

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b) However, these costs may be addressed through a second, more accurately-priced issue of
shares.
5. Can the recommended offering price of $28 per share for Netscapes stock be justified? In valuing
Netscape, make the following assumptions:
Total cost of revenues remains at 10.4% of total revenues,
R&D remains at 36.8% of total revenues,
Other operating expenses decline on a strait-line basis from 80.9% of revenues in 1995 to 20.9%
of revenues in 2001 (this would give Netscape a ratio of operating income to revenues close to
Microsofts which is about 34%),
Capital expenditures decline from 45.8% of revenues in 1995 to 10.8% of revenues in 2001,
Depreciation is held constant at 5.5% of revenues,
Changes in net working capital of essentially zero,
Long-term steady-state growth of 4% annually after 2005, and
A long-term riskless interest rate of 6.71%.
Given these assumptions, and starting from its current sales base of $16.625 million, how fast must
Netscape grow on an annual basis over the next ten years to justify a $28 share value?
Ans Estimate future cash flows and compute PV
$28 share value
33 million existing shares
5 million proposed for the IPO
28(33+5)M=1064M market value
Riskless rate should be our CoC rate; 6.71%
So in ten years the firm should be worth 1064m(1.0671)10=2037m
and to get from 16.625m to 2037m in ten years, the firm must grow:
(2037/16.625)^(1/10) 1= 0.62= 62% per year
From the information we can see that the growth rate is 4% from 2005 which suggests that the growth
is a lot lower in the long run than 62% suggesting this is an overestimation of the company's potential.

6. As an executive in Netscape, what would you recommend with respect to the proposed offering
price? As an investor in Netscape, what would you recommend? As the manager of an
institutional fund who was willing to buy and hold Netscapes stock at the originally proposed
price of $14 per share, would you be willing to buy and hold at an initial offering price of $28 per

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share? In your answer, consider also the proposed increase in number of shares offered from 3.5
million to 5 million
Ans
Recommendation for the Executives of Netscape
a) If the IPO is successful, the company will benefit from its increased valuation and access to a
larger amount of capital
b) But will the company be able to maintain this share price?
c) The company needs to grow by 60% each year to justify the offering price which seems
excessive especially for long term sustainability.
Recommendation for an Investor in Netscape
In Favour:a) Optimistic perceptions as a result of company confidence and responsiveness to market demand
b) High investor demand in current conditions is unlikely to falter
c) Reputable underwriters: Morgan Stanley and H&Q
In Against:a) More risk averse investors may conclude the $28 offering price is too high
b) Unpredictability of hot issue markets
Overall recommendation is that an investor willing to take on a higher amount of risk should accept the
proposed offering price of $28. Reject if risk averse.
Issue of sustainability as fund managers are likely to have long term objectives.Assuming greater
technical and financial market expertise than typical investors and thus Overall recommendation that
the fund manager should reject the proposed offering price of $28.