Please I need someone to do a paraphrase to this answer.if u know the answer please answer it if not, just do a paraphrase for the answer .

CORPORATE FINANCE

CASE STUDY NETSCAPE

1. Does Netscape need to go public to satisfy its capital needs? Describe Netscape s business model. What might be its capital needs over the next 3 to 5 years? What sources other than the public equity market could satisfy those needs?

The main reason behind the decision of the Board of taking the company public is indeed to satisfy its increasing capital needs. Netscape is active in a high growth industry and the public equity market can provide a substantial inflow of cash that could fund that growth. Does the company absolutely need to go public at this point to satisfy its capital needs? Probably not, there are other options that could be considered. However, an IPO is a viable option that could very well be what the company requires.

At the time of the IPO, Netscape is an extremely young company with only 18 months of history. The company had a range of software products that helped clients communicate and transact in the young internet and private IP networks. Netscape was the absolute leader in this space in 1995. Most of the company revenue would come from product sales, being Netscape Navigator its flagship product and bringing over 50% of the revenue. In addition, Netscape would offer additional side services such as consulting or maintenance. Because of the highly scalable nature of its products, Netscape could achieve very high gross profit margins. On the other hand, the company had to spend very significant amounts of money in Research & Development and Sales & Marketing.

Over the course of the past 6 months, Netscapes assets grew by $35m whereas the company generated a $4m loss. Creating an approximate $40m in capital needs in just 6 months ($15m is deferred revenue). The future of the company at the time where the case is set is extremely unpredictable. We do not know precisely how sales, margins or investments will change over time. If we estimate that assets double every year for the next 3 years and we maintain a decreasing net loss margin. Capital needs for the next 3 years would around $300m. Therefore, offering 5 million shares at $28 a share would bring the company almost 50% of the capital needed for the next 3 years.

Often the main alternative to going public is seeking a traditional Private Equity investment. However, the nature of Netscapes business would have made it difficult to attract potential Private Equity investors that usually seek stable, predictable and positive cash flows. Nonetheless, the company could probably continue relying in venture investments for 1 or 2 years with an ambitious Series D funding round. If Netscape continues to be a successful, then the company would probably have to go public eventually anyway unless the company is, by that time, capable of generating positive cash flows and rely on debt (which seems unlikely). Another probable exit that would not end up in floating the companys stock would be selling to a competitor, namely Microsoft or another large corporation with vast resources.

2. Why, in general, do companies go public? What are the advantages and disadvantages?

The main reason companies use an initial public offering is to raise capital. In general, this capital is used to invest in the company to accelerate their growth or to remunerate early shareholders and employees. It is also considered as a milestone for most company and send a strong signal to possible investors. The main advantages of an IPO are the liquidity generated and the legitimacy the company get. The liquidity is used mainly to invest in the company, usually through research and development, infrastructure (and other capital expenditure). It also can be used to remunerate early shareholders (such as venture capitalist) and employees (if a part of their remunerations are shares, or through a raise).

Moreover, public stock can be used as a currency (which can be traded on public exchange) to grow through acquisitions. This acquisition can allow the company to strengthen its market position by taking out competitors and allow synergies through the business units.

Finally, a public offering offer a certain publicity and legitimacy for the company. It will allow to the firm to secure financing at a cheaper cost and eventually gain bargaining power. It also sends a strong signal to potential investor as it shows the company is ready to cover the cost of going public and the management (that usually own share) is expecting the company to grow.

Nevertheless, going public can present certain disadvantages. First of all, going public is an expensive process. The set-up of the IPO by an investment bank (underwriting) is quite costly. There are also extra costs in order to meet the requirement imposed by regulators and the management is going to focus on the IPO rather on the core business of the company. Moreover, being a public company imply yearly (or quarterly sometimes) cost in order to meet regulators requirement (legal cost, SEC financial statement filling in the US...) which can damage the companys bottom line. Going public imply opening the equity to new shareholders who are going to put pressure on the management to achieve certain growth targets, buyback program or dividends. Finally, if the IPO is not going well the companys equity can depreciate to become a penny stock or even to 0 leading the firm to bankruptcy.