NetscapeCommunications is a company operating in the telecommunicationsindustry. It focuses on the provision of software in the form ofintegrated client, server, and embedded applications. Their productshave a massive role in the commerce of the internet platform and theprivate internet protocol networks (D’Souza 54). NetscapeCommunication, therefore, contributes significantly to the growth ofservers on the World Wide Web through the multimedia. The company’ssoftware have been developed t facilitate the provision of enhancedsecurity through the use of secure codes that provide confidentialityin the execution of financial transactions. Additionally, the companyengages in the sale of advertisements through the internet platformas well as the private IP networks (D’Souza 54).
In line with thechanging operational frameworks of business organizations, thecompany has embarked on diversification of its production process toremain competitive and profitable in comparison to their competitors.The most popular product as per the company is the NetscapeNavigator. The product allowed the individual personal computer (PC)to exchange important information as well as other forms of businessoperations through the internet. Additionally, the product composed49% and 65% of the company’s total revenues for subsequent quartersspanning March and June 1995 (D’Souza 55). The company was alsocredited with the production of server software that providedcompetencies to necessitate the creation and operation of webservers. The last product incorporated both browser and serverfunctions thereby enabling companies to manage the large scalecommercial sites effectively on the internet.
In anunpredictable industry, the company has undergone substantialevolution to achieve its current status as one of the leaders in thisindustry. The development of the internet has set the tone for thechanges witnessed in this industry. This can be attributed to thefact that the use of the internet has continued to increase in alllocations across the globe implementing in the course of theiroperations. Based on these facts, there has been a substantial demandfor the company’s products. Netscape entered the market through agroup of computer science students in at the University of Illinoisdeveloped a graphical software while working at the National Centerfor Supercomputing Applications.
Currently, thereis a massive excitement amongst the investors concerning thefinancial and share performance of the company’s stocks. The boardof directors had sanctioned the company to undertake its initialpublic offer (IPO). This is the first time a company sells its sharesto the public. In other words, the initial public offering providesan enterprise with the opportunity to raise expansion and investmentfunds through public involvement. With Netscape having scheduled theIPO and contracted underwriters, the financial scene changed with theincreased demand for the company’s shares.
The high requestof the company’s shares was evident when the company’s leadunderwriters proposed to the board the need to increase the offeringprice. According to the new proposition, the executives of thecompany were implored to increase the offering prices from 14 to 28.This represented a 100% increase in the prices as had earlier beenplanned. The reason for the recommendations to increase the priceswas as a result of the oversubscription of the company’s shares.According to the original plans of the company, the IPO would involvethe issuance of 3.5 million shares. However, with theoversubscription witnessed, the number of shares was increased to 5million to match the demand. The company executives are thereforeexcited because a company with a book value of $16 million and wasyet to break even was now being valued at over $1 billion (D’Souza54). The sudden changes in the market brought a dilemma to theexecutives of Netscape. A decision had to be made with regards towhether to react to the zeal of the Wall Street or whether thecompany had to stick to its fundamental principles in the course ifits growth into one of the market leaders in the telecommunicationsindustry.
The process ofvaluing a company is one of the most important aspects of businessorganizations. This is because, through the determination of acompany’s value, various business operations can be initiated.Factors such as the raising of funds through financial institutionsas well as payment of taxes hinge on the value of a company.Investors are interested in the valuation process as it determineswhether such an entity might be able to provide the necessary returnsin comparison to other companies within the industry. Various factorsmust be taken into consideration when establishing the value of thebusiness organization. Additionally, the process of valuationinvolves numerous steps.
The first step inestablishing the net worth of business is planning and preparation.It is at this stage that all the relevant information is assembled.Additionally, the business owners need to determine the need forbusiness valuation. Research indicates that the value of businesswill depend on how and why it is measured. In this regard, the factsrelating to the business are likely to have a substantial effect onthe value of business under consideration.
The next step inthe valuation of an enterprise requires adjustments to be made on thehistorical financial statements. This is because business judgment issynonymous with economic analysis exercise. The best valuationresults can be obtained by using financial statements spanningbetween three and five years. This period provides a level ofconsistency in the analysis and the results obtained can be used toprovide an actual performance of the company. At this phase ofvaluation, it is important to establish an authentic relationshipbetween the assets owned by the business organizations as well as itsexpenses and obligations to other parties. This form of analysis alsorequires the inclusion of incomes that can be obtained from the assetportfolios of the business organization.
The choice of thevaluation methods is the next phase in the valuation of business asin the case of Netscape. In this level, there are three fundamentalapproaches used to establish the value of an enterprise organization.They include the asset approach, market approach, and the incomeapproach. The choice of method of business valuation depends on aseries of factors such as complexity of the organization’s assetbase. Additionally, it depends on the history of the company earningsas well as the ability of comparison analysis of the enterprise saleon the market. Finally, the determination of the cost of capitalwith regards to both equity and capital plays an integral in thedetermination of the most efficient method of valuing a businessorganization.
The asset-basedbusiness valuation models are recommended in enterprises where theasset-rich company needs to justify the costs in addition to othercomplexities. The asset accumulation method may be utilized in thiscase. This method is also recommended when dealing with instancesthat require the allocation of business purchase prices across allthe individual assets held by the commercial enterprises. In thiscase, the asset purchase agreement features prominently. The downsideof this method is that it requires exceptional skills in thevaluation of the respective assets and liability owned by thecommercial enterprise. It is also regarded as time consuming processsince it requires the inclusion of various factors in thedetermination of the final answers.
The market-basedvaluation process, on the other hand, focuses on the estimation ofvalues through the examination of the sale data relating totransactions as contained in the actual marketplace. The types oftransaction data that can be used in this study fall into two majorlevels the guideline transaction is valid in companies operatingwithin the same industry. Comparative transaction, on the other hand,applies in instances where the study is dealing with private firmsthat are regarded to have a similar subject business. This method ofvaluation uses pricing multiples such as selling price to revenue andsale price to business earnings such as net incomes and net cashflow.
The income-basedapproach to business valuation determines the value of companies byfocusing on the earning powers of the company organizations. This isthe most accurate method of assessment according to the enterprisevaluation experts. All forms of estimates under this approachintegrate the discounting and capitalization process of the companyearnings to determine the corresponding values of the enterprisesunder consideration. The discounting methods are known to provide themost accurate results since they allow for the specification of thedetails relating to the income flow over a period. Therefore, for ayoung and rapidly growing company determined to issue its IPO, thecash Discounted Cash Flow method is the most efficient method forvaluing the business. A capitalization method under the income-basedapproach includes the Multiple of Discretionary Earnings which allowsfor the determination of the value of the enterprise based on awell-established capitalization rate.
The fourthdemands for the implementation of the selected business valuationmethods. This can be accomplished through the ValueAdder, businessvaluation software that automates complex calculations and allows foreasy adjustments by incorporating what-if valuation scenarios.Finally, the last phase of the valuation process involves reachingthe business value conclusion. In this case, the value of Netscapewill be determined based on the asset approach. From the aboveanalysis, it is evident that some of the components of the businessvaluation are the financial statements. Such documents are used toprovide historical data that can then be used at discounted rates todetermine the actual value of the enterprise.
Business value=Assets + Business Goodwill
Based on theshare price of $28 and the issuance of 5 million shares as per theunderwriters, the company will be valued at a significantly highervalue in comparison to the book value (D’Souza 54). At this price,the company is overvalued and as such should go public since thelevel of interest by the investors has spiraled massively. Therefore,the share prices will provide the company with the additionalfinancial strength.
D’Souza, Lowell. FINA 3301: . NortheasternUniversity, 2016. Print