Nestel harward case study
Netscape Communications co Founded in April 1994, Netscape Communications Corporation provided a comprehensive line of client, server, and integrated applications software for miscommunication and commerce on the Internet and private Internet Protocol (IP) networks. These products enabled the growing network of servers on the World Wide Web to communicate through multimedia, including graphics, video and sound.
Designed with enhanced security code, these software products provided the confidentiality required to execute financial transactions and to sell advertisements on the Internet and private IP networks.
I nee company’s most popular product, Netscape Navigator, was ten leaning client software program that allowed individual personal computer (PC) users to exchange information and conduct commerce on the Internet. Navigator featured a click-and- point graphical user interface that enabled users to navigate the Internet by manipulating icons and windows rather than by using text commands. With the user- friendly interface as a guide, Navigator offered a variety of Internet functions including Web browsing, file transfers, news group communications, and e-mail.
Initially shipped in December 1994, Netscape Navigator generated 49% and 65% of total revenues for the quarters ended March 31, 1995, and June 30, 1995, respectively.
Netscape server software provided enterprises with the basic abilities necessary for creating and operating Web server “sites,” or places on the Web which browsers could visit. Research Associate Kendall H. Backstairs wrote this case under the supervision of Professor W. Carl Jester as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.
The Internet was a global network designed to facilitate communication between some 35,000 computer networks using the enabling code termed Internet Protocol. According to International Data Corporation (DC), in mid-1995 there were approximately 57 million Internet users.
Of those 57 million users, DC estimated that approximately 8 million were accessing information on the World Wide Web. Engineered in the early asses, the Web was a technology that linked one bit of information on the Internet with another so that users could share “webs” of ideas.
The Web consisted of a network of Web servers that posted information in a common format described by the Hypertext Markup Language (“HTML”). Internet users were able to access information on the Web by implementing the appropriate Hypertext Transfer Protocol (“HTTP’). Because it necessitated complex coding, the Web had remained largely undiscovered by unethical users who simply wanted to browse, a popular pastime which came to be dubbed “surfing the Net. ” 1 Bundled packages of Netscape Navigator and Netscape Commerce Server accounted for about 10% of total revenues In ten TLS quarter, Wendell I immaterial.
Netscape Entrance TTS contribution In ten second quarter was Meanwhile at the University of Illinois at Urbana-Champaign, a group of computer science students working at the National Center for Supercomputing Applications (NCSA) developed the graphical software program that gave rise to the notion of “surfing. ” Named NCSA Mosaic, the software program enabled unethical users to access and retrieve information on the Web. The Mosaic code organized Web information into neat collections of graphical electronic menus on which users could simply click-and-point to browse their contents.
In April 1993, the founders of Mosaic, under the leadership of then senior Marc Andresen, began distributing the software for free to anyone who had the technical means to fetch it electronically. The superb results of this strategy?two million Mosaic users within one year?made for more than cocktail conversation among high-tech gurus in Californians Silicon Valley.
Jim Clark, the founder of Silicon Graphics, Inc. (known for its workstations that turned data into 3-D computer images), was among those who were impressed not only by Mosaic itself but by the broader vision of its creator, Andresen.
After hearing that Andresen had moved to Silicon Valley in early 1994, Clark sent him an email asking if they might meet to discuss the future of Mosaic. This exchange and subsequent discussions formed the launching pad for Mosaic Communications, which was shortly renamed Netscape Communications Corporation. In addition to dropping the Mosaic name, Netscape paid Spyglass (the company that had engaged in an exclusive licensing arrangement with the University of Illinois) a one-time $2.
4 million fee for the rights to certain Mosaic code. With the original code, Clacks management experience and $3 million in seed money, and
Andresen’s vision and technical expertise, Netscape made its entrance into the highly dynamic Internet market. Netscape entered the broad Internet market via the Web browser market, where it faced two challenges: it had to set a new industry standard, and it had to make money. The former challenge was the immediate concern. To set a new standard, Netscape Ana to create a program Tanat would destroy Mosaic, winch In 1 wallet 60% of the Web browser market. The rival program was initially named Maxilla and then changed to Netscape Navigator at the time of its debut in December, 1994.
Using the same “give away today and make money tomorrow’ strategy that Andresen’s team had used to popularize Mosaic, by the spring of 1995 Netscape had succeeded in capturing 75% of the Web browser market. Mosaic, under the guise of Spyglass, trailed far behind with 5% of the market. Having set the industry standard, Netscape was poised to make money by selling server software to companies that wanted marketing access to potential consumers. The Competitors Netscape was the indisputable leader of its kind. As the Internet community and its demands continued to increase, however, so did the multitude of competitors.
Netscape faced potential competition from new entrants in the Web browser, server and service markets, PC and UNIX software vendors, and on-line service providers. Financial information on the following competitors is provided in Exhibit 3. Spyglass, Inc. Was Netscape nearest competitor with its Enhanced Mosaic Web browser technology. However, while Spyglass marketed the only current rival product to Netscape Navigator, it did so to a distinctly different market. Instead of focusing on the commercial browser market dominated by Netscape, by mid-1995 Spyglass had honed its strategy on the code market.
As a code vendor, Spyglass produced the code and then sold it to other software companies wanting to incorporate it into their own programs. Spyglass also sold the computer code for creating server software. By employing this strategy, Spyglass attempted to capture the corporate market, which would ultimately compete with Netscape on the end-user front. Microsoft, for example, was among Spyglass’ licensees and a rising competitor for Netscape. 3 As the De facto gatekeeper of computing, Microsoft was perhaps the most formidable of Netscape competitors in the long-term.
In August 1995, the powerful PC software company was only weeks away from releasing its long-awaited Windows 95 operating system, which included a rival browser it had created from Spyglass code. The Microsoft browser would allow Windows users to access Microsoft Network, the company’s proprietary on-line service, and would also offer broader Internet access. Further, Microsoft was scheduled to release its server software in mid-1996. The on-line computer service providers also had made strides recently to move into Netscape market.
For example, both America Online and Prodigy had created independent browsers.
Compuserve had licensed Spyglass software code for its recently released Web browser software. In mid-1995, these three on-line services had a total of approximately eight to nine million subscribers. As the on-line market became increasingly threatened by the rising popularity of the Web and its access providers, it was imperative that these companies compete for Netscape market if they hoped to participate in the unfolding future of on-line commerce and communication.
Initial Public Offerings (Ipso) Young, rapidly growing companies facing intense competition typically raise equity UAPITA in two broad ways. One way is through a private equity transaction, and the other is through a public offering of stock. A private transaction involves direct negotiations with various financial or nonofficial institutions.
In such a case, a company raises money from these various entities, which then own a portion of that company in the form of its privately held shares of stock or other securities convertible into stock.
If these private investors wish to sell their stakes in the company, they must negotiate the terms of the sale with known buyers given the absence of a liquid market. A public issue entails the sale of a company’s equity to the public at large. The stock trades on public markets (either organized exchanges such as the New York Stock Exchange or over-discounter markets such as the NASDAQ), provided that the issue has been registered with the Securities and Exchange Commission (SEC). An example of a public issue is an initial public offering, or an PIP, in which a company issues a portion of its stock to the public for the first time.
Companies find it desirable to “go public” when their equity capital needs increase to the point where the opportunity cost of remaining private and compensating investors for the lack of liquidity become too great relative to the lower cost of capital derived from liquid public markets. While the monetary benefits of going public are potentially sizable, so too are the associated costs. The total costs are comprised of ongoing costs associated with being a publicly traded company and one-time costs associated with the PIP itself.
Specifically, ongoing costs result Trot ten need to report timely International to investors and regulators. One-time costs, which are attributable to direct costs (legal, auditing, and underwriting fees) and indirect costs (management time invested in the process, and the dilution associated with selling shares at an offering price that is, on average, below the price prevailing in the market shortly after the PIP), reflect the time and financial commitments associated with the PIP process.
The human capital resources involved in the process of an initial public offering include the company’s founders and senior management, the underwriters, and institutional investors. If the company had received venture capital in the early stages of its development, a characteristic referred to as the endure capitalists are often intimately involved in the PIP process as well as the company’s operations. By creating liquidity and market-determined prices for the stock, going public creates the potential for substantial financial rewards for all of the parties involved. The “Going Public” Process In the United States, companies issuing stock to the public for the first time typically use what is known as a “firm commitment contract. “2 This contract describes the relationship between the issuing firm and the investment bankers underwriting the offering.
Specifically under the contract, the underwriters first commit to bear the risk f the issue by purchasing the shares offered, less an underwriting discount. The underwriters then guarantee to deliver the proceeds of the sale (net of commission) to the issuing company, whether or not the offer is fully subscribed.
In the event of weak demand or underestimation, the underwriters are allowed to sell the remaining shares at a lower price. Such action is referred to as “breaking the syndicate,” as the syndicate of underwriters is originally formed to stabilize the market price immediately following the offering. On the other hand, in the event of throng demand or oversubscribing at the time of the offering, the underwriters can sell additional shares, called an overstatement option or “greenness,” amounting to as much as 15% of the total shares offered.
At times, the PIP market is characterized as a “hot issue” market because of the high returns earned Day Minimal Dryers AT ten snares. Sun salaried returns occur as a result of either underpinning or oversubscribing of a company’s shares. This was the experience of Boston Chicken, which saw heavy initial demand and an unprecedented increase of 143% in the company’s stock price after its PIP in November 1993. In Boston Chicken’s case, this value increase was sustained over time.
Not all companies experience a similar result, however.
Snapped, for example, saw its stock price explode in after-market trading following its December 1992 PIP, only to lose this premium value over time. In yet another recent PIP, that of Piece in July 1995, the company’s stock price fell nearly 15% after the first day of trading following the offering. Clearly, not all companies have the good fortune of offering their stocks to the public during hot issue markets as indicated by such disparate outcomes. Netscape PIP
Netscape Financing History In response to its growing capital needs, in early 1995 Netscape began to explore the option of raising money through an initial public offering (PIP). The PIP market in the first half of 1995 had generated proceeds totaling nearly $12 billion for some 300 companies, which saw their stock prices increase on the first day of trading by an average of 20%.
This outstanding momentum was largely attributable to venture- backed high-technology stock offerings (which recently represented well over half of all venture-backed Ipso), particularly those related to the Internet. A five-year history f the PIP market is illustrated in Exhibit 4; a chart illustrating PIP waves for the past ten years is shown in Exhibit 5; and information on several recent Internet-related Ipso is provided in Exhibit 6. ) In the spring of 1995, Netscape decided that the time was right to initiate an initial offering of its stock, despite its limited track record. The principal reasons for going public were to fund expected future growth, to stockpile cash reserves for potential acquisitions, and to gain visibility and credibility within the industry.
Since Clacks initial investment, Netscape had been injected with various forms of investment capital. Clark himself contributed an additional $1.
1 million in the fall of 1994. At the same time, the another type of contract between the issuer and the underwriters is known as a “best efforts” contract. Unlike a firm commitment in which the underwriters assume risk, a best efforts contract only requires the investment bankers to make their best efforts to sell the minimum under AT snares. In ten event tenure Is Instrument anemia to Dully succeeds ten minimum number of shares, the issue is withdrawn.
This type of contract is typically used in smaller, more speculative offerings. Silicon Valley venture capital firm of Klein, Perkins, Subfield & Byers invested $5 million.
The third and largest round of financing came in April 1995 from Adobe Systems and five other media companies. This final private placement of stock totaled $18 million and was orchestrated by Morgan Stanley. At the time of the PIP, Clark, Klein Perkins, and the group of media companies owned the largest stakes of Netscape equity at 24%, 11%, and 11%, respectively.
The company’s president and CEO, James Barked, held shares amounting to 10% of total equity. The PIP -ream The principal parties involved in the PIP of Netscape included the founders and the senior management team; the venture capitalists at Klein Perkins; and the investment bankers at Morgan Stanley and Hamburger & Quits (H), the co- underwriters of the PIP.
In addition to the lead underwriters, there were 26 other investment banks in the syndicate to help create a market for Netscape shares.
They all had agreed to pay the final offering price, less underwriting fees, to Netscape in the event investors withdrew their orders. Auditors, lawyers and insurers also provided necessary services. Netscape co-founders and senior management were intimately involved in the PIP process, both from a practical and financial perspective. Since Netscape was not generating profits, the lure for Netscape recently formed senior management team was not high salaries, but rather preferred stock that could be converted into shares of common stock when Netscape went public.
Clark and Barked, as well as others on the management team, including the Vice President of Technology, Andresen, stood to gain millions on paper in the face of a highly oversubscribed PIP within a “hot issue” market.
The lead underwriters were engaged in the PIP process from the very beginning. The investment bankers from these firms were responsible for everything from doing the initial “due diligence” to issuing the final prospectus, which stipulated the final offering price AT ten snares. IT ten proposed price was approved Day ten Dora, TN underwriters would earn $9. Million, or a 7% sales commission on every share sold to initial investors. 3 Going Public On July 17, 1995, Morgan Stanley and H issued a preliminary prospectus, or an offering circular, suggesting it might offer 3. Million Netscape shares priced at $12 to $14 per share.
This preliminary offering price was based on Netscape future business prospects of Netscape and the Internet industry in general, financial and operating information of Netscape, and stock price-related data and other financial and operating information of competitors.
The next and final step before the offering was the “road show,” in which management and underwriters made presentations to potential major investors throughout the world. The purpose of a road show was largely to stimulate interest among institutional investors. Clark and Barked Joined the underwriters for a two- week road show, which entailed traveling to 20 cities and talking to about 2,000 institutional investors. A road show also enabled underwriters to gauge the interest of institutional investors for purposes of determining the final offering price.
Upon returning from the road show, the Morgan Stanley underwriters called some of the investors they had previously visited to assess their current interest in terms of price and quantity of shares.
The response was overwhelmingly favorable, yet only indicated potential demand. Such potential would not be This commission value does not account for the potential exercise of the overstatement option. At 750,000 shares, this option would generate an additional $1,470,000 at $1. 6 per share. Clearly, the underwriters would benefit from any demand for shares in excess of the original five million being considered.
6 realized until the orders in the “book” were translated into purchase orders when trading began on the day of the offering. Despite this uncertainty, however, the investment bankers from Morgan Stanley and H felt confident enough to recommend doubling the offering price proposed in the preliminary prospectus.