A successful IPO is brought about because of several factors and even an element of luck. Over the past few years, there have been some truly big names that have flattered to deceive and underwhelmed when they went public. The reasons for this have been attributed to a range of factors from an overpriced offering to a bearish, pessimistic market where new equity issues were treated with a lot more caution. On the other hand, some names that initially flew under the radar were off the blocks quickly and netted the company adequate capital to run their operations. One such company was Netscape that decided to conduct an Initial Public Offering (IPO, also called primary issuance) in 1995 to raise capital to pursue new growth opportunities.
Once the IPO proceedings were initiated, the company in conjunction with the investment banking syndicate agreed upon an offer price of $14 per share. However, the bankers, seeing the massive level of oversubscription in the stock recommended that the company increase their offer price to $28 per share. This would have the dual advantage of balancing out supply and demand and would also net the company more capital. Yet, it was still a risky ploy. A 100% price correction pre-IPO was uncharted waters for both the investment bank and the equity markets. The Board of Director for Netscape had a tough choice ahead of them, however in the end, they decided to increase the price to $28. It is pertinent to point out that a lot of the hype generated on the stock resulted from the extravagant level of hype generated by dot com stocks during the pre-bubble days. Taking advantage of this Internet boom, Netscape had a product offering that revolved centrally around its Netscape Navigator Browser. The company had additional service lines in consulting and maintenance and support services from which it generated service revenues on top of the product revenues generated from its client, servers and integrated applications lines.
In terms of the industry itself, the Internet was a phenomenon of the likes the world had rarely witnessed in its history. As the fastest growing sector of the 1990s, there were approximately 57 million users of the Internet in mid-1995 when Netscape was preparing to go public. Out of these, the International Data Corporation (IDC) estimated that the number of World Wide Web users had increased to 8 million. In addition to that, the mid 1990s marked the beginning of a time when companies actively started to budget substantial amounts for IT and Internet related spend in order to maintain and gain market share over competitors through a first movers advantage. As prospective investors looked at the stock in light of all these growth opportunities from both a consumer and a corporate standpoint, the appeal of Netscape grew brighter. Here was a company with world class services that was poised to cater to an ever-growing population of Internet users.
From Netscape’s perspective, this was a perfect time to conduct a primary issuance. The market was hot and in play and they also needed the capital to fund expansion to accommodate the expected demand that the corporate shift into IT would generate. Initially, in the preliminary stages of the IPO, the prospectus suggested that 3.5 million shares would be issued at an offer price between $12 and $14. After the roadshow was concluded with prospective investors in over 20 cities, the bank’s underwriters suggested increasing the share count to 5 million shares and doubling the IPO price to $28. After some amount of thoughtful deliberation, the Board of Directors approved this action, doubtless swayed by the fact that recent dot com stocks who had conducted primary issuances had rocketed upwards from the first day they started trading. Eventually, the shares were floated on to the market at $28 per share and by the end of the day, were selling for $75 (168% increase) and the oversubscription amount on 5 million shares turned out to be 100 million shares. As a direct result of that, a book value of $16 million dollars in equity in the IPO was transformed into a billion dollars in market capitalization.