Beruflich Dokumente
Kultur Dokumente
of IndiaWorld
Th!
VS
Mlrthy
This is tlre
frsr
time
at
Indian conrparry hzs paiA fot 4 strategic value of this size to demorctrate
necessary evmtually
En*
Young,
A Landmark Acquisition
Established in December 1998 in Secunderabad (Andhra Pradesh, India), satyam Infoway Limited
(Sify) was one of the first private Internet Service Providersr (lSP) in India. On November 29,
it
India\
The acquisition was done rhrough an all cash dEfl1 *hich h^d to be executed in two phases. In
the first phase, Sii' had to acquire a 24.5% stake (49'000 shares) in lndiaVorld for fu 1'22 bn,
aftcr the deal was announced in November 1999. In the second phase, Sifi had to purchase the
remaining ?5.5olo stake (1,51,000 shares) at Rs.3.25 bn, in cash, before September 30, 2000' Sifr
also had to pay a nonrefundable deposit of Rs. 513 mn, which it would fodeit, ifit did not complete
the second phase of the deal.
The deal surprised stock market analysts and merger and acquisition gurus both in India and
abroad. According to an employee ar Rediff.coma, "People didn't believe that the value ofthe deal
could be Rs. 4,99 bn. Some of us felt it was a wire agency mistake." Financial analysts too were
i-
iinked to thc Interner through a dcdicated communication linc. It ollers othcr comPanics
k also allows individual uscrs to dial up and acccss thc lnternet
:
r
I
ICFAI Cenrer for Managemenr Research (ICMR), an afdliate of ICFAI. All Rights Reserved. For accessing
anci procuring the case study log onto www.ecch cranfield ac'uk'
raken aback. The question on everyone's mind was-Dd Sifr take the right
decision, investing
fu' 4.99 bn in Indiavorld, which had reported a net profft ofRs. 2.? mn on revenues ofps.
13 mn
in the frnancial year 1998-19991 How did sify arrive at a figure ofRs. ,1.99 bn figu..
*itr.
the acquisitioni vhat srrategic and ffnancial benefits accrued to Sifr ftom this acquisitionr""ti,rg
Doel
it really make sense for sifi to invest Rs. ,r.99 bn for India!7orrd's 0.2 million shares, paying
a
whooping amount of fu. 24,950 for each share of Indiaworld, which had a face
u"tu. oizu. i6r
some analysts were of the opinion that the deal was grossry overvarued. Expressing
his concerns,
Manish Gunwani, a Financial Analyst at ssKI,5 said, "There arenir too many populindia.,
portals
and India\forld had a high profile. Even then, the valuation seems ,'.ry ,t .t"h.i.
It', based on whar
may happen, not on cunent realities." Analysts also drew comparisons.,rn th
L"di.rg,oft
Infosys, whose Rs. 10 paid up shares quoted at Rs. 9,250 on November 30, 1999.
"r..o-f"rf
However, Sii''s cEo and Managing Director, R Ramarai, remained confident about
rhe deal.
He said, "The acquisition wouldbe a good snategic fft to satyarn Infoway,s portalbusiness,
adding
a large overseas Indian audience to the large India-based audience thai *wwsatyarnonline.com
cu.ently enjoys. The combined portal network is expected to be a mega portal for India interest
audience in India and elsewhere.',
Valuing Dotcoms
The objective of valuing any company is to determine a fair price that an investor
should pay, to
buy an equiry stake in the company. Tiaditionar methods for valuing firms were a.u"top"a'ro,
Brick and Mortar (B & M) companies which had tangible asrea as weir as crearly deftned
sources
ofrevenues. The traditional methods for valuing ffrms included rhe Dircounted cash
Flow Method
(DCF), rhe Economic Value Added (EVA) method, the pure play or comparable
cornpany approach,
and rhe multiplier method (Refer Exhibit I).
Most traditional models for valuing B & M firms were based on publicly available financial
ligures. Tiaditional models like the cosr Merhod, valued companies based on the
book value or
ner asser value of their tangible assers\31buildings, machinery and intangible
assets such as
goodwill of the firm. The Discounted Cifr Flow Approach valued a ffrm on
the basis of the
present value of the future cash flows that the firm would generate.
However, using traditional models ro value dotcoms had several anomalies. For a dotcom
company, tangible assets were only a few \treb servers, some equipment and oftice
space, which
was not a substantial investment. since most ofthe dotcoms were fairly new companies,
intangible
assets such as goodwill were nonexistent for them. Moreover, the Discounted
cas'h Flow ApprJach
could not be applied to dotcoms, as there was a lack of sufticient historical data to proyecifuture
cash flows.
In the absence ofhistorical data, dotcoms could not be valued through rhe cornparable company
or Pure Play model. This model involved comparison of one ffrm with anorher ffr,n .rrg"g.iin
similar business and of similar size. In the case of dotcoms, it was diftcult to find sultisrictly"
comparable firms with all frnancial and business information necessary for valuation.
The valuation of dotcoms was further compricated by the fact that they were not profitable.
Most dotcom cornpanies including large ones such as yahoo! and Amazon had not
recorded positive
earnings' Because ofthe negative earnings, valuation experts were not in a position
to measure the
JSSKantilalIshwadal(SSKl)SecuritiesPiiuut"Li*@
Stock Exchangc.
j.:: :::: j : l. ! :::'].'i]Uied ior the fUtUre on the basis of historical data a5 well as
flow is arrived at after
ua,r_ap,io"i'n,",1""aa.'.a.:----'a a:;:'nacc: oilhe conlpany The free cash
deductingthein\esi-e_::^:::':l--'_jii]igeneratingtheneededcash,ilows-fhefreecashflowis
(WACC)olthe
ciiscounled,
company.
Cost Method
Thi(
is considerea
a^ -_!a
:-:'
Economic valrF
{ddac F\ \
-':
Cose Fal.:
-'-"r
ICiJR
i",
:- :__:::-: : -r-.- -:l: la lhe traditional model. The model was a scenario_based
- .-:-?:-:..:_.::nario According to McKinsey, $e valuation of the company
model rrii:::.::a:
- ::: : -: -:.j!irv and the company i,n the future, when it h.rd achieved a
began b! ::::- - -:
sustainabi::.: - r::-::a r-'--_ -::: -.:::d oibeginning bydetermining itscurrent level of performance.
The valuei :: - : .:- r :,_. :!:r i :':: :- I e\irapolate th is information to estrmate the current pedormance.
It was base:
However::::':_:::1:t_:-:":-:t?kealmostl0yearsioranlnternetcofipanytoachieveastate
of stable a-: :-::: -.r =-: .: --. ::.uitv in valuing high Srowth companies such as those in the
lnternet
a
of
irr-:-. . 'j'.'- --.!:- . -.:':,:ieC with them The use of a probability-based scenario provided
:' . : - -.:-a'a-a--.:-::.i:,qintoconsiderationthis uncertainty ThLrs, the future iinancials
methoi
a
comp:_.
]' a:-a
a'=a . la "-' . '- _;: a: scenarios that made the valuation more valjd, than
valLlatioll
Adapted ftum
f he Datk
Muan,
March 2000
Acquisition of lndiaWorld
The Mumbai-based India\rorld was established by fujesh in 1994. h provided web-based solutions
and India-based conrenr ro nonresident Indiaru. The company operated popular portals such as
samachar.com, khel.com, dhan.com, bawarchi,com, khoj.com erc. These portals recorded a total of
13.5 million page views during october 1999 (Refer Exhibrt III). lndiavorld was the only dotcom in
India that had been earning proffts consistently for three years prior o the acquisition. Its profits were
meager, but at
that rime, very few companies in the global dotcom induscy had profftable operations.
The first phase of Indiaworld's acquisition was financed by sis through the funds raised from
its Initial Public offering (lPo) of American DepositoryShares (ADS)B on NASDA0 (this offering
Amcrican Depositorv sharcs arc shares issucd undcr an American Dep"'ito.y R"."ip-IADR;
ihi"-f, i,
actualtv tradcd ADR is a ncgotiable certilicric isued by a US bank rcprescnring a speciffc nuribe, of shu.",
of a
@m
Thc N'tunal Associatn,n ofsccuriry Dcalers Automarcd euotation was cstablishcd in t9i1. k is the wortd's
6rst
clccnonic sock markct lt consis ts of a compu terued systcm thatprovidcs pnce quorarions and allows the tradingof
:rvrrrl stockr. It has tradiiiurlly list. J and rrrJcJ scvcral hi-rcch sto<ks.
F\hibit
II
l: lndia\\lorld's Websites
Khoj.com:Khol.:--::-::-:-:r:-r:'-:'i:ieltprovidesvisltorswiththeoptionofsearching
pro\'ldcs
' - :
: ! -_ :--- :a :lma.har, Khel, Bawarchi etc. The site also
t :_ : .:: : - : :: _ia.maton (covering general affairs, business, sports,
: -: .: r _-: r:: L::rs the option of adding their personal URLtoa
Lravel etc.) ab.-: -,:
Search Engine'bv sat)'am lnfoway
: r: ::
.
parLicularcate=:_
":_:: 'linr
:
: j_-1:t:: li prolides the latest nervs on differeni sports from
Khel.com:Kna::_ ::::
- . : - :: '-: : ^-r'Der of articles on a variety of sports and presents
n]u,-ry puur c''.'a
: ': i : '! Pro\ des visitors the option to open e-mail accounts
interviews \\',i_ : ::-:-:-r.::
:i - . : :: :': : re scoreboard Lhat provides continuously r-rpdated
aurrv o" :_ ;
_::
"ni
- -_:::::
scores dLrnn-s : :":
']'\!useTstoshopiorbooksandothersportinggood5
::
.
:'-.
' . :-: : r''lsiie b! lnd an sports enthLlsiasts
generr
This ls
. :,..:::: :an onlinecookbookforlndianfood, cateringloan
Bawarchi.corr: : : : :l
::i -. :, r.cipes that are arranged boLh alphabetlcally as weli
::
OVerSeaS allal :_ -:
.
i: a secl on that handles clrreries lrom !isltors regarding
:
:
::
,
-:
as accordir: .:
. , - -'- . .:i ng special recipcs fot dlffcrent festivals ln addit on,
:
henlth and r'-:- l'
. :,! :':ilucersof lnilkprocluctsand cookingoil. Ihes tealso
-: ' :
the slte pro. r-:
-: : ::'::S ishand lndianloodterms,toremoveanyconfusion
has an inte,:: : r :.
: :- - _li\ tcfll]s.
.. -. .
that vi-(itor: - :
_
- _ : :_ :n indi.rn history Tlle site has articl(]s and featur'"s on
Itihaas.com; ,
.
: :: . : . rrd jnto iour sectjons. The first section begins with the
cliiier-.nt p.- , '
- -1 \D. The second section covers Nledleval lnclia The
Harappan :
-:
..1. io the independence of the country in 1947 Thefinal
third sectta_ -I --,
: : ::- _::p-ondence era. The site cannot be regarded ns a
::
section ! '
-:
:: - :.,: I does provide some uselul rnfotmation quickly for
.
coripreh:-:
intereste:i - l -:
of 100,000 spread over 30 cities. S_ify also had popular websites tit. *"tt.r*",.t
..orn,
carnaticmusic.com' carstreer.com (Refer Exhibit IV) which provided
content and e-commerce
solutions to resident Indians. IndiaWorld, with its large overseas audience,
provided Satyam an
ideal opportuniry to extend its services.-ro rhe NRl_segmenr. The
merger also pro"ia"a Si5, i:.i
million page views per monrh (of IndiaVorld) tn addiiion ro its o*rr li million page
views.
si6/ was confident about the benefits ofthis expensive acquisirion. Ramaraj
said rhat rhough
funds raised through the ADS issue to set up its own websires,
ir
would have taken a very long time for these websites to record the page
views that India\7orrd
artra*ed Moreove! rhe websites ofrndia'irorrd had good brand equity a-nd
enloyed higl, i.;J;;
populariry among overseas Indians. He was of the opinion that tire
acquisition was" in line with
Sifi."s overall objective ofproviding total Internet solutions to.ur,o-.rr.
,IndiaVorld
-Analysts
".qri..r.h. b"y;@
1.1:l,a'll::lll:l:
unlvilling ro pay a l:l:::-to,a_vc.nturc
hishcr price bccause
Parliculars
Rs.
(in
n)
2001-2002
lncome
32.86
Service lncorne
1.61
Other lncome
Total lncome
34.47
4a.27
60.07
1 .24
61.31
4.76
53.04
Expenditure
Operating ara Cere'a :\genses
Finance CaaeS
Total Erperditure
re':= -:.
LProfiVLos'
.66
18.33
0.37
19.28
15.39
2.55
i.71
2.24
0.97
1.13
o.69
29,81
4.66
64.48
53,s0
\3.17j
(0.46)
10.18
I5.81
0.30
Cosl of Se^'i.e
21
1999-2000
2.00
i:, :.
!!':
'!
-arelrc;oeResen e5
4.3 5
aa:
3.16
9.82
10.96
16.74
-.i-=
lnveslme:-1r
Currenl
a,,'.6r'
ti.
:;'. 'a
Provisiar5
Net CLi::::
2000.2001
2.00
1
.15
2001-2002
2 .00
0.65
1.04
Loans
Net Fixec
Balance Sheets
Particulars
5.',I
2.49
1.81
9.71
9.41
13.78
31.65
3.03
18.7 5
37.25
:i-'4'
(5.78)
(9.1e)
(8.63)
*NctCurTer,r_.:-.:=:=::-:::-:t=-cencuncntAssctsandthcsuraofcunentLiahilitiesandProvisions.
.--:.7-':c '''.--' :
'l,lJ-
Ccnnunications
--, .....p"ntof".t
Although stock markets initially hailed the acquisition, the performance of both Sifi, and
India!/orld after the acquisition was not impressive. The eamings for both companies were negative
despite the growth in page views (Refer Exhibit V and VI for Financial Rerui r).
4),
The authar
wa a Research
Associate
References
l.
2.
3.
4.
tor
-ln
vstors
swbalakrutHip1,,AcqaisitiotL
5.
6.
Prcrodrll^iJtqdrPric
vist anatlror filg,*ilFrrdrY-r
llid,
Asir-rlErh,Afe
Sfusfur
ld&raioa,
Business world,December
27, 1999.
7.
8.
Charles
k*r.tie4
2UJO.
9.
Cavdb,LtE
H4
Ri,ll.ay 28,2W.
10. N lanatilwbHlkr*
Arlpq March 2000.
l, 20Cf.
I l. ?acy M44 bnfl'.J,-,Nbl
t2. Sliy ?irlcr hfl-H-9.,1-,n4
The Hindu Business Line, Jull 4, 2000.
Analyst,.Lll 2000.
13. Pnyadadi ld,tat*Effl*.
14. MukulPotS'Ha'rg:r'
-tt Oa&q 16,2N2.
Artrt, I,{arch 2000.
5. Indian Dr-h,
Brirrr
16. www.\,cliu-c
17. www.Sifi@t
18. wwttnmgl19. wwwnafuo-
Questionsfttffi
dJLEH b7Sfi provides ffnancial analysts an ideal opportunity to
Jl
for valuing dotcoms. \X/hat is the primary
-A^ni<m
Vhat are the problems involved in using traditional
e oqd
ofwhhft.--f.-s
in the Intemet industryl
1. The acq,'iii-
p.'korfu
JSf, rd IndiaVorld for the linancial years 2000-01 and
{S
200142- Cry&FdEdqrgies
of the acquisition to the actual performance of
in E, *as the price paid for the acquisition reasonable I
Sifi, and lndr'H.hlhde
Discuss. Vh-thrytrsof
SiS after the acquisition of India'l7orldl
3. There arc ser:r{ *ir
ach with varying degrees of applicability and
=Sod;
rinHe and appropriate rnethod for valuing dotcom
suitabilitp VEI 3 & u
stand.
companis Ib L&'Hfrlfiprr
Study thc