Netscapes Initial Public Offering Harvard Case Solution & Analysis

1.      Assessment of the funds needed and consideration of the options available

Technology industry in which Netscape operates is a very complex industry because it is susceptible to continuous change and latest innovations would obsolete the former products, so in order to cope with the changing environment and to determine the possible funds needed to finance the future needs, we have assumed that the company will report same growth in its operating expenses as it has been reported in the last six months.

Our analysis in Appendix 1 shows that the company reported a growth of 117% over the past six months. Further, it has also been determined that the minimum funds requirement of the company over the next five years would be $436,566,784 with the maximum funds requirement of $21,172,072,488 for the next ten years, so the organization shall plan an appropriate strategy to finance the funds required

The company can either finance its operations through debt or equity and it’s the part of the company’s corporate strategy to opt the specific option. The following are the options available to the company to raise funds and to finance its growth.

(a.    Debt finance

Debt finance is a financial strategy where the organization borrows specific funds from another party for a specific period of time. If Netscape opts a debt financing strategy to finance its growth then it will reduce the debt to equity and interest coverage ratio substantially, which will ultimately threaten the credit rating of the company. Currently the organization has a debt to total equity ratio of 21.3% and has a negative interest coverage ratio of (32.48) times and if the organization avails the further debt finance then it will further Detroit these ratios.

There is an increased possibility that the lender may require firm to pledge assets in order to secure the repayment of funds. Further, the lender may also charge high interest rate for bearing increased risk, but on the other hand, Netscape had grown tremendously over the past few years which would encourage lenders to provide financing facility. Additionally, if the organization avails debt facility, then it will benefit the organization because interest is a tax deductible expense in calculating taxable profits which would tend the company to report a lower tax expense.

(b.    Equity finance

Equity finance is a strategy where the fund providers are provided specific stake in the company. If the organization avails equity finance to finance its strategy then it will increase the number of shareholders of the company which will reduce EPS and hence share price. Further, dividend payable to the shareholders is not a tax deductible expense in calculating taxable profits which will increase the tax expense of the company.

Equity finance is the most expensive means of financing because shareholders provide residual interest in the company, but on the other hand, the company is not obliged to pay dividend as in case of debt financing where the company is obliged to pay a specific interest within a certain span of time. Further, if the Netscape avails equity financing then it will restructure the capital structure of the company and will increase the debt to equity and interest coverage ratio.

(c.    Convertible bonds

Convertible bonds possess a hybrid structure, where the bonds have the capability to convert into common equity shares. If the organization avails this strategy then it will benefit the organization because the interest rates charged on convertible bonds are low as compared to other debt financing options because of their hybrid nature. Further, interest charged on convertible bonds is a tax deductible expense in calculating taxable profits which will reduce the tax expense of the company

2.      Evaluation of the Initial Public Offering (IPO) strategy and pros and cons of such strategy

Initial public offering (IPO) is a strategy where the organization first time offers company’s shares to the public. The main objective of the Initial Public Offering (IPO) is to raise sufficient funds to finance its liquidity. Further, it can also improve the company’s image which could act as a marketing strategy where the general public becomes aware of the existence of the organization

If a company needs large amount of finance to finance its required capital expenditure, then organization considers for the IPO program, but raising finance through IPO is not beneficial for all the companies because it changes the capital structure of the company which may not align with the company’s core objective. For instance, if a company needs funds to finance its growth, then it does not mean that.................................

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