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