Netscape Communications Corporation has decided to undertake an Initial Public Offering (IPO) in order to raise additional capital. Until this point, the company has been funded through private investors; the IPO will put the company's stock on the public market. The offer price was intended to be $14 per share, but the lead underwriters have now proposed that the offer price double to $28 per share. Netscape management must now determine whether the higher price can be justified. To do this, it must consider the effect of the price change on Netscape employees, management, shareholders and institutions.
IPOs are undertaken when a company reaches a point in its development that requires a considerable infusion of capital. The decision to "go public" means that the ownership of the company will be diluted from a closely held few to many, which decreases the span of control that the original owners have in the organization. However, selling shares on the open market means that the company can generate far more capital without resorting to debt financing.
This is not to say that companies cannot attract investors without having a public offering. Companies which are privately held can attract private capital (venture capital) through private placements; these investors are rewarded through dividends and the potential that a future public offering might be made. Until the company is taken public, however, these investors are left with an investment which is not considered "liquid" because of the difficulty in locating a buyer for these shares.
In the public equity market, there is less participation in the running of the organization by its shareholders. Anyone can purchase shares in the organization, and there is no limit on the number of shares that can be purchased at either the high or low end (although investors purchasing more than five percent are required to register with the Securities and Exchan
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