American University of Beirut
Case Study Analysis
Netscape’s Initial Public Offering
Prepared by:
Assadi, Louay
Koleilat, Jana
Course #: MFIN 304
Instructor: Saffeidine, Assem PhD
Due Date: October 10, 2013
Marc Andreessen and James Clark founded Netscape Communications Corporation in
1994. The company was primarily concerned with developing applications “for
communications and commerce on the Internet and private Internet Protocol (IP)
Networks”. Since the Internet was a booming industry at the time and the demand on
Netscape’s offerings was high, it had an opportunity to grow in the market and become
more profitable which entailed the need to raise more capital.
Taking into consideration the competition that Netscape had (such as Microsoft on the long
run) and in order to be able to finance its growth strategy, the company decided to raise
capital by going public through the issuance of stock for the first time, which is known as
Initial Public Offering (IPO). For this reason, it employed Morgan-Stanley as its
underwriter.
The underwriter suggested that to Netscape to offer 3.5 million shares priced at 14$,
however, it soon changed its suggestion to issuing 5 million shares at the price of 28$
which increased the value of Netscape from 49$ million to 1.4$ billion. Netscape’s board
of directors faced a dilemma of whether or not to go with the proposal of their
underwriters given the fact that their revenues were only 16$ million in 1995 and the
company was bearing losses and not making any profits.
It is interesting to note that at the time of the IPO, the equity of Netscape was distributed
the following way: 24%, 11%, 11%, 10% and 44% owned by Clark, Perkins, a group of
media companies, Barksdale (the President and CEO) and the public respectively.
1. As per the above, 11% of the company’s equity was owned by a group of media
companies. And based on its balance sheet, the total equity amounted to 16,475,521$ as of
June 30, 1995. Therefore, the minimum value that these investors must have assesses for
Netscape’s assets was equal to 1,812,307$ (=16,475,521$*0.11).
2. The market value of equity of Microsoft is equal to its current stock price
multiplied by the number of shares outstanding. As per exhibit 3, its stock price at the end
of June, 1995 was equal to 90.38$ and the weighted average number of shares outstanding
was 627,000,000. Therefore, the market value of equity for Microsoft would be the
