Netscape Initial Public Offering free essay sample

Netscape Communications Corporation, founded in April 1994, provided a comprehensive line of client, server, and integrated applications software for communications and commerce on the Internet and private Internet Protocols networks1. Also designed with enhanced security code to provide secure financial transactions and transfer confidential information over the Internet and private IP networks. The board faced a pricing dilemma within the context of an extremely unpredictable industry.Their responsibility was to determine the appropriateness of the proposed increase in price after balancing the potential risks and rewards that might accompany such a move1. Netscape has been so successful due to a few factors. For one, Netscape has stellar management making important business decisions. Also, they have proven to be successful in securing a steady flow of capital injections from various private investors.By setting a new business standard between 1994 and 1995, Netscape was able to dominate in overtaking Mosaic, the largest market share holder of that time. We will write a custom essay sample on Netscape Initial Public Offering or any similar topic specifically for you Do Not WasteYour Time HIRE WRITER Only 13.90 / page However, the threat of its competition has become increasingly worrisome and their position is rather risky. Thus, Netscape must consider going public and generate capital in order to maintain a competitive advantage and continue to capture market share. Netscape needs to seriously consider undertaking an IPO because it has reached a point in its development that demands substantial injection of capital.Although going public will result in a decrease in the control the original owners have in Netscape, issuing shares on the open market will allow the organization to generate enormous capital while avoiding an increase in its debt obligations. Although Netscape has been privately held and can attract private through private placements, these investors hold illiquid shares because of the difficulty to find a buyer for their shares. After going public, these shares will then become very liquid and thus carries a major benefit to current shareholders. A major factor in considering this IPO is the way in which it is done. The underwriters that purchase the initial shares of Netscape will carry substantially more risk than Netscape. The underwriters participating will guarantee Netscape the proceeds from each share at the offer price decided upon. At this point, Netscape will have been issued the capital injection and the responsibility of selling these new shares to the public will fall in the hands of the underwriter(s). On the other hand, Netscape carries some risk in deciding to undergo an IPO. Once public, the ownership of Netscape will become diluted and the value of the company will more than ever, be decided upon by market conditions.Netscape must decide on the optimal offer price, because a higher price offers the greatest amount of capital raised, but a price too high will have much difficulty being maintained in the market. Furthermore, as a public company, Netscape will put itself in the spotlight and will remain there for as long as their stock is traded on the public market. A fundamental difference between a private company and a public company is that a private company can legally withhold financial statements from the public, whereas a public company gives up this luxury.Netscape’s offer price was thought to be $14 based on the initial analysis, but the underwriters are currently suggesting an offer price of $28. There are two things to consider when arguing confidence around the offer price suggested by the underwriters. For one, too low of an offer price results in high demand for the shares, thus the institutions involved will have a negative opportunity cost in participating in the deal. Secondly, too high of an offer price results in an inability to sell the shares at the agreed-to offer price, thus the institution will result in a loss when the syndicate is broken.Although the company has yet to post a profit, there is still substantial interest in Netscape’s IPO. Their financial position, coupled with the demand for their IPO, sh ows that the equity market in which Netscape will enter is fueled by speculation as much as it is by analysis. As a new company, Netscape is not expected to post a profit, as few companies do in the first few years of their existence. However, their young, rapid growth, and intense and effectively competitive approach justifies their IPO offer price of $28.A crucial piece of information to consider is that the underwriters are suggesting the price increase, all while knowing they borne the majority of the risk if the IPO is a bust. Underwriters work on IPOs around the clock, and taking into consideration their expertise as well as Netscape’s strong management and dominant market presence, I strongly suggest Netscape goes public at the higher offer price of $28 per share. Moreover, the news of the change in offer price may stir even more positive speculation around Netscape and improve its performance in the equity market.