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The IPO That Inflated the Dot-Com Bubble

By Alex Planes – Aug 9, 2013 at 3:39PM

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Learning from the market's past to understand its present.

On this day in economic and business history...

Netscape went public on Aug. 9, 1995, just over a year after its founding, and only eight months after releasing the first version of its groundbreaking Web browser. Shares were offered at $28 apiece before Netscape's IPO. At the opening bell, the price shot up, and by the end of August 9, Netscape closed at $58.25 after reaching as high as $74.75 during the day. This meteoric rise valued the 16-month-old company at nearly $3 billion. Netscape had yet to make a dime in profit.

A decade later, Adam Lashinsky wrote Netscape's eulogy on CNNMoney:

Netscape mesmerized investors and captured America's imagination. More than any other company, it set the technological, social, and financial tone of the Internet age. Its founders, Marc Andreessen and Jim Clark -- a baby-faced 24-year-old programmer from the Midwest and a restless middle-aged tech pioneer who badly wanted to strike gold again -- inspired a generation of entrepreneurs to try to become tech millionaires. Executives with old-economy experience thought they could stake a claim to start-up riches by quitting their jobs and following the example of Jim Barksdale, the former McCaw Communications chief who came in as Netscape's CEO. And Netscape's practice of openly sharing technology so that other programmers and their companies could build upon its ideas helped give rise to a global technology community, the open-source movement.

Netscape quickly skyrocketed to a share price of $174 at the end of 1995 before enacting a two-for-one split in early 1996. The Dow Jones Industrial Average (^DJI -0.34%) and the Nasdaq Composite (^IXIC 0.28%) both shot to eye-popping levels following Netscape's IPO. The old-economy index rose a staggering 23% per year over the following four years before peaking at the start of 2000. The Nasdaq, despite growing increasingly packed with dubiously overvalued dot-coms, didn't actually perform much better for those four years, as it grew at an annualized rate of 25.8%. However, the fifth year was the kicker -- despite a massive peak and a subsequent decline through much of 2000, the Nasdaq still increased its annualized growth rate to 30.8% for the five years following Netscape's debut, while the Dow's annualized growth rate fell to 18.5%.

Netscape's stock never quite regained its luster after that late-1995 peak, as Microsoft soon began to eat into Netscape's browser share with Internet Explorer. Netscape's market share peaked at 80% in 1996, and had fallen below 50% by the time AOL acquired it for $10 billion. By 2002, Netscape (via AOL) was reduced to lobbing law bombs at Microsoft, as its market share had shriveled to less than 10%. By 2008, Netscape was defunct as a browser. Today, it lives on only as a discount Internet service brand for dial-up users -- a service every bit as obsolete as the browser it abandoned in 2008.

After 2000, the Nasdaq, much like Netscape, faded from prominence. Following its close on the five-year anniversary of Netscape's IPO, the Nasdaq suffered through a lost decade in which it lost about of its value 5% each year. The Dow, while not offering much in the way of gains, at least remained essentially flat over the course of that decade.

An ugly end to a beautiful relationship
Firestone, a subsidiary of tire manufacturer Bridgestone, announced the second-largest tire recall in American history on Aug. 9, 2000. The recall, encompassing 6.5 million tires, was initiated after the National Highway Traffic Safety Administration linked the company's tires to hundreds of accidents that had resulted in nearly four dozen fatalities.

At the center of the recall was the Ford (F -0.30%) Explorer sport utility vehicle, on which the treads of defective Firestone tires would peel off at alarmingly high rates. Once the link between the Ford Explorer and Firestone's tires became public knowledge, the two companies began a bitter back-and-forth blame game, as each tried to accuse the other of concealing prior knowledge of the defects. Ford quickly stepped up with an unprecedented offer to replace all Firestone tires of the affected model -- including those not subject to Firestone's recall -- at its own expense. This brought the total number of recalled tires up to about 14.4 million, pushing its size past the previous record-setting recall of 7 million tires, also initiated by Firestone in 1978.

Firestone and Ford had worked together since the first Model Ts rolled out of Henry Ford's earliest plants in 1908. After the recall, their relationship ended. Following the resignation of Bridgestone's Japanese chief executive in 2001 -- a necessary move after the company's profit fell by 80%, and its Firestone sales collapsed by 40% by the end of its 2000 fiscal year -- new CEO John Lampe severed his company's relationship with Ford, publicizing a letter sent to Ford's CEO blaming the automaker for breaching Bridgestone's trust, and using Firestone as a scapegoat during the recall fiasco.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more insight into markets, history, and technology.

The Motley Fool recommends Ford. The Motley Fool owns shares of Ford and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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F
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