Netscape Navigator

1. Netscape Navigator which is the company’s most outstanding product enables users to exchange information and electronic commerce (E-Commerce) on the internet. The navigator that has a user-friendly interface enables users to navigate the internet by manipulating icons and windows instead of using text commands. Moreover Netscape’s navigator provides other functions of the internet such as web browser, file transfers, news group communications and e-mail. For the quarters ended March 1995 and June 30, the navigator generated 49% and 69% respectively of the total revenue. Further more the navigator provided supplementary functions to other business and non business enterprises such as the provision of website space on the internet, place on the web where web browsers could visit, integrated application software programs to harmonize huge business transactions via internet and other full scale electronic commerce through seamless applications.
Netscape’s strategy was to set a new industry standard and to make money by creating a program that would destroy Mosaic which had 60% of the web browser market. The rival product was later named Mozilla and then renamed Netscape Navigator at the end of 1994.
Netscape faced competition form PC and UNIX software vendors and on-line service providers which where practically new entrants in the web browser, server and service markets especially as the internet and its demand increased in a rapid pace. Microsoft was also one of Netscape’s strongest competitors in the long run because in 1995 Microsoft released Windows 95 operating system which included a rival browser that was created from spyglass code. The Microsoft browser is very efficient and allows Windows users to access Microsoft Network, the company’s proprietary on-line service and broader Internet network access.

2. Netscape needed to raise money through initial public offering in 1995 because she needed to fund expected future growth, stockpile cash reserves for prospective acquisitions and also to acquire a better reputation and credibility within the industrial communication and technology industry. Going public was certainly one means of Netscape to source for new capital.
3. The advantages of going public arises the equity capital needs to increase to the point where the opportunity cost of remaining private and compensating investors for the lack of liquidity becomes to great relative to the lower cost of capital derived from liquid public markets. The disadvantages of going public involve the associated costs of being a publicly traded company and also the costs associated with the initial public offering.
4. Establishing a fair price for the offering of 28% is very difficult. There is not much to calculate as far multiples analysis is concerned. There are few true comparables to Netscape and strictly speaking Netscape had negative earnings and operating cash flows at the time of the offering.
5. Buying Netscape at 28% per share might be risky this because using the valuation model to access its financial performance, might not give a true picture of Netscape’s financial performance because of uncertainty surrounding Netscape’s future performance. Netscape’s value is seen most probable in the growth options that it possesses not in the cash flows arising from its assets. Buying Netscape’s stock is similar to buy an option on the web industry. There is so much uncertainty even though there positive aspects of its financial performance outweigh its negative aspects.
Cash Flow Valuation for Netscape
ACTUAL FORECAST

1995

1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Revenues

16,625
25,790
40,007
62,061
92,272
149,342
231,666
359,372
557,476
864,785
1,341,497
Cost of goods sold

1,731

2,693

4,177
10,051
10,051
15,592
24,188
37,521
58,205
90,290
140,062
Gross profit

14,890

23,097
35,830
55,581
86,220
133,749
207,478
321,851
499,271
774,495
1,201,435
R&amp.D

6,115

9,486
14,715
22,827
35,411
54,931
85,211
132,184
205,051
318,085

493,430
Other operating expense

13,449

18,284
24,362
31,585
39,370
46,138
48,405
75,088
116,481
180,691
280,297
Operating income

(4,675)

(4,672)
(3,247)
1,169
11,440
32,680
73,862
114,579
177,739
275,719
427,708
Taxes

0

0
0
0
5
11,111
25,113
38,957
60,431
93,744
145,421
Net income

(4,675)

(4,672)
(3,247)
1,169
11,435
21,569
48,749
75,622
117,308
181,975
282,287
Cumulative tax loss

(4,675)

(9,347)
(12,594)
(11,426)
0
0
0
0
0
0
0
Capital expenditure

7,618

10,012
12,731
15,404
17,157
16,161
25,070
38,889
60,327
93,582
145,170
Depreciation
918

1,424
2,209
3,427
5,316
8,246
12,792
19,843
30,782
47,751
74,073
Free cash flows

(11,375)

(13,260)
(13,769)
(10,809)
(406)
13,654
36,471
56,576
87,763
136,144
211,190
Terminal value

Source: (http://www.brainmass.com/homework-help/business/finance/21019)

Assumptions

Riskless rate 6.71% Current shares outstanding 32,764
Discount rate 12.00% New shares 5,000
TV growth rate 4.00% Total shares 37,764
Changes in NWC 0.00% Value per share $28.00

PV of cash flows $173,587 Cost of revenues 10.4% of sales
PV of Terminal $883,971 R&amp.D 36.8% of revenues
Total PV $1,057,558 Other operating expenses Decline to 20.9% of sales by 2001
Capital expenditures Decline to 45.8% of revenues by 2001
Depreciation 5.5% of revenues

.

Reference:

(http://www.brainmass.com/homework-help/business/finance/21019)