Netscape’s Initial Public Offering
Executive Summary
Netscape Communications Corporation was founded in 1994 to provide client, server, and integrated applications software for the internet and other Internet Protocol (IP) networks. The company found early success capturing the browser market by offering its Netscape Navigator client product for free with the goal of generating revenue on the back end by selling server software to companies that wanted marketing access to these potential customers. Although the undisputed leader in the industry, Netscape anticipated significant competition from the pending release of Microsoft’s rival browser, Internet Explorer, and on-line computer serve providers such as America Online and Prodigy.

Despite their dominant position in the industry, Netscape had yet to turn a profit and, in 1995 began to explore raising necessary capital through an initial public offering (IPO). The preliminary prospectus prepared by Morgan Stanley and H&Q suggested it might offer 3.5 million shares at $12 to $14 a share. However, a month later, the underwriters advised the Netscape board to increase the initial offering price 100% to $28 per share. At this new offering price, the firm's value would be $1 billion, raising many eyebrows since their 1995 revenues to date were only $16 million, the firm was only 16 months old, and they had not yet shown a profit. The board needed to decide whether the required annual revenue growth rate could support a firm valuation of $1 billion or if raising the price would be interpreted as inappropriately opportunistic.

1. Why, in general, do companies go public? What are the advantages and disadvantages of public ownership?
Companies typically 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