About Sify

• Established in 1998
• First ISP in India with a subscriber base of 0.1mn in 30 cities.
• Portals:
– satyamonline.com
– Walletwatch.com
– Carnaticmusic.com
– Carstreet.com
• Approx 13 mn page views per month
 About India World
• Established in 1994
• Provided web based solution
• Major portals:
– Samachar.com
– Khel.com
– Dhan.com
– Bawarchi.com
– Khoj.com
• Approx 13 mn page views per month
• Earning profits consistently for three years
• For FY 1998-99 :
– Revenues:Rs.13 mn
– PAT: Rs.2.7 mn
 The Acquisition
• In Nov 99 Sify announced acquisition of IndiaWorld
• Per share value of Rs.24950 paid.
• All cash two phase acquisition valuing Rs.4.99 bn
– 24.5% stake in IndiaWorld for Rs 1.22 billion during the
time of announcement of the deal
– an option of purchasing the remaining 75.5% stake at Rs.
3.25 billion in cash before September 30, 2000 by paying
a premium of Rs 513 mn
• Second phase later modified to cash + stock deal
with Rs.2.15bn in cash
 Acquisition Synergies
• Large overseas Indian customer base of
IndiaWorld
• Big Brand Name & Visibility
• Highly popular web sites
• Providing total internet solutions
 Anomalies while valuing technology
firms using traditional models
• Negative operating income leading to negative cash flows
to the firm .
• Treatment of R&D expenditure as operating expense .
• Calculation of sustainable growth rate due to negative
Return on Capital Employed.
• Volatile historical data leading to difficulty in computing
cost of capital .
 Cont…..
• Lack of information regarding firm of
similar size for comparable valuation
technique to be utilised by analyst .
 Analysis of Price paid and synergies

• The price paid was a P/E multiple of 8237 times

which was very high for a technology firm
• The company had to grow at 11.97% till
perpetuity at 12.5 % WACC to justify the price
which is highly unrealistic .
• The sensitivity analysis suggests that the
company needs to grow 31% annually to cover
the WACC of 31.5% to justify the amount paid .
 P/E Ratio Analysis

• The price earnings ratio is not applicable for

the years 2000-01 and 2001-02 particularly
on account of the fact that Indiaworld has
had negative earnings during those two
years.
• The price to sales ratio of Sify has shown a
dramatic decline in the next two years
indicating that the firm’s price to sales ratio
was inadequate.
 Strategic fit
• Sify had made forays into the domestic
market and was catering to Indian clients.
India world was on the other hand catering
to a variety of foreign clients .
• However, its expectations have been
belied particularly on account of the fact
that India World has sustained huge
losses in 200-01 and 2001-02
 Cont…..
• The revenues of the firm has increases by 100%
in 2001 but has been accompanied by a 100%
rise in cost of service
• The company has suffered huge increase in cost
of service, operating and general expenses and
marketing and promotion expenses
• The revenues have risen due to marketing efforts
and not on account of expected synergies
 Dupont Analysis:

• The Dupont analysis conducted shows that in

the year of acquisition the company had ROE
of 47% which may have caused the investment
bankers to value a high price of the company
• Sifys nearly threefold increase in operating,
Administrative , personnel and marketing
expense coupled with no synergies has resulted
in the company suffering huge losses
 Page view multiplier model:

• At the acquisition price the market value per

page view is a 31.99 for India world much
higher than Sify’s 14.23 .
• Revenue per page view is pretty low at 0.15
which indicates that there is a pretty low
conversion rate in terms of revenue
• A high market value per page view with low
revenue per page view creates anomalies in
the valuation process.
 Cont…..
Valuation of the Price/ Revenue multiples has
been done considering three scenarios:

• Scenario 1: This considers the market value of

Sify as proxy for market value of Indiaworld.
This is highly unrealistic on account of the fact
they are not comparable companies in terms of
revenue, asset base or otherwise.

• Scenario 2: Using the preacquisition price as

proxy price for India world.
 Cont…..
• Scenario 3: Using the book value of equity as proxy for
the market value.

The price revenue multiple varies from 3.3 to 202 to.25

for scenario 1, 2 and 3 respectively. Moreover if Sify
price is used as a proxy for the price of India world, the
valuation of the company is at 83.03 million which is
much lower than the 4.99 billion paid
 Some points to note
• Uncertainty brings with it its own set of problems
• Valuation of companies with volatile and negative
earning s need to be done cautiously
• Too high a price should never be paid for
companies not having a high asset base or a
proven track record
• Market might over hype value and sales but is
ultimately a great leveler as was witnessed in the
dotcom crash that followed.
• It is not prudent to acquire firms during bubble and
market abnormal returns might not always be a
good indicator of performance.
 Sify ADS Analysis
• Revenue per share for Sify post merger shows
that it has increased at an average growth rate
of 20% which is pretty low. The growth rate will
have to be much higher if the high price is to
justify itself.
• price by revenue multiple has fallen down
substantially from 2536.38 in March 2000 to
23.11 in September 2002. The fall has been on
account of decline in prices of the shares (ADS).
• Prices of shares have dropped from 210.52 to
4.28 in the same period.
 Cont…
• Price paid prior to the dotcom burst was
unreasonable and irrationally higher for the two
companies
• The earnings that were estimated post merger for
Sify and Indiaworld was too high.
• The price revenue ratio has come down from the
dizzying heights as the stocks of Sify post
acquisition of Indiaworld has failed to delver .
• The average fall in price per quarter over the last 3
years has been 7%.
 Valuing non-dotcom firms
• Traditional methods:
– DCF
– EVA
– Comparable Firms
– Multiplier Method
• Based on historical and current earnings
and other tangibles
 Limitations
• Tangible physical assets include web
servers, some equipment and office space
• Lack of sufficient historical data to project
future cash flows
• Very few comparable firms
• No well defined profitable revenue
• Negative earnings sometimes prevents
forecasting
 Valuation Factors for dotcoms
• Internet traffic
• Market size
• Features of web site
• Competition
• Replicability
 Valuation Models for Dotcoms
• Valuation using page views as a multiplier
• Valuation based on quantifying qualitative
factors
• Modified DCF Model – McKinsey & Co.
• Damodaran’s Model
• EVA Model
• Other Models
 Valuation using page views as a
multiplier
• Parameters needed to measure the price per page view of a
dotcom viewer
- Market Capitalization Value
- Page Views
- Revenues Earned
- Calculate Market Cap
- Determine avg daily page view
- Calculate Market value per daily page view
- Identify revenues per year
- Calculate revenues per page view
- Calculate price/revenue in terms of page view
 Valuation based on quantifying
qualitative factors
• Three basic factors for valuation are
- Management
- Market Segment
- Manner in which funds are invested
Modified DCF Model – McKinsey & Co.

• Three changes made to traditional model:

– Determine the state of the industry and company in future
when it had achieved a sustainable and moderate growth
rate
– Work backward and estimate the current performance
– Future financials predicted for a range of scenarios
 Damodaran’s Model
• Based on cash flow generated by a firm
• Two stage growth – high growth period followed
by stable growth
• Parameter required
- Growth rate in revenues
- Length of high growth period
- Capex, depreciation, and working capital during
high growth period
- Expected growth rate during stable period
- Cost of capital
- Beta of comparable firms to be used
 EVA As A Valuation Tool
• EVA Valuation is extension of the DCF valuation
approaches
• The total value (debt + equity) of business could be
expressed in EVA terms :
V = (Total Invested Capital)t0 + ∑((EVAt) /
(1+Kwacc)t)
Total Invested Capital = Current Cumulative Level of
Invested Capital
EVA = (Adjusted NOPAT) – (Capital Charge)
Capital Charges = (Periodic Invested Capital) *Kwacc
 Other Valuation Models for Dotcom Co’s

• Value per Customer : The value of each

customer to the firm is:
VX = Summation (CFX/ (1+r) ^t)
where :
CFX - cash flows generated per year
R - discount rate which can range from the
riskless rate, if the customer has signed contracts

for n years to remain as subscriber or WACC.

T – No.of years
 Cont…..
• Value of the firm = VX*NX
where : VX – Value per customer
NX – Number of Customers

If the firm decides to add the subscribers at a growth

rate, then there will be a cost of advertising and
promotion C for each period . Then the value of firm
will be =
(NX*VX) + Summation (NX (VX-C)/ (1+k))
 Cont….
• Value per subscriber: For firms which rely on
subscribers for their revenue, the value of the
firm can be determined for comparable firms as

(Market value of Debt + Market value of

equity)/Number of subscriber.

This multiple of comparable firms could be used

to calculate the market value of the concerned
dotcom.
 Cont…
• Value per customer: Firms which rely on retail
can determine value per customer of
comparable firms as:

(Market value of Debt + Market value of

equity)/Number of customers

This multiple of comparable firms can be used

to determine the market value of the
concerned dotcom.
 Cont…
• Value per site visitor: Such can be calculated
as:

(Market value of Debt + Market value of

equity)/Number of visitors to the site

This ratio could be used to value the company

 Optimum Valuation Method
• no single method is adequate to value
dotcom company particularly one which has
no proven track record and facing an
uncertain future

• Each and every method has its own pitfalls

whether DCF, comparable methodology or
specific sectoral multiples. The most ideal
method to value a dotcom is a combination of
each of these methods
 Cont….
• Assumption: the stock market is efficient ie. all
factors relevant to a stock are incorporated in the
stock price

• The stock market valuation is used as Y for this

purpose: All other relevant methods including, the
DCF, EVA, comparative methodology and sector
specific multiples are considered to be
independent variables
 Cont….
• Using these, for a set of similar companies in the
industry Discriminant analysis is run to obtain
the weights for each of the independent
variables

• The weights obtained from analysis are then

used for the valuation done by different methods
for the concerned dotcom and the final value of
the stock is determined.
Thank You