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Enron Mail |
Hey kids,
My two cents. No problems with the model or the assumptions. I thought it would be interesting to look at a 3-stage model where the growth of the company has extremely fast growth in the beginning, and then a slower growth before the terminal valuation stage (zero growth). Under this model, to justify a $28 stock price, Netscape would have to grow 60% annually for the first 5 years, and 30% for the next 5 years. Thinking big picture, it would not be out of the ordinary for Netscape to be generating $1 billion in revenue after 10 years of growth. Netscape would probably be able to generate such revenue but not without branching into other services or products, most of which would not have been developed in 1996, i.e. Netscapes stock price includes the optionality of future services and products that they haven't even generated yet. I was dubious then as I am now that Netscape could be worth so much with a single and free product. We will need to address in our memo the likelihood that Netscape could leverage their early success into other profitable ventures. My simple adjustments to the model are attached. PS Jeff- You asked for an example of the agency dilemma. A good example of this can be demonstrated by the largest (at the time) leveraged buyout of RJR Nabisco where the company was generating a lot of free cash flow that was being spent on perquisites- company jets, golf tournaments, etc. This was because management had different goals than shareholders. Since management could not find profitable investments, instead of giving the FCF back to shareholders, they spent it on themselves. When management has minimal ownership in the company, they frequently do things that are in their own best interests and not necessarily in the best interests of the shareholders like implementing poison pills. ********************************************** Mark D. Guinney, CFA Consultant Watson Wyatt Investment Consulting 345 California Street, Ste. 1400 San Francisco, CA 94104 (415) 733-4487 ph. (415) 733-4190 fax - Netscape.xls
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