The case provides details of Sify's acquisition of IndiaWorld, including the structure of the deal, its perceived synergies and the criticisms leveled against the huge amount paid for the acquisition. It highlights the problems encountered when valuing dotcom companies using traditional models of valuation and describes certain valuation models that were devised for valuing dotcom companies.
Established
in December 1998 in Secunderabad (Andhra Pradesh,
India), Satyam Infoway Limited (Sify) was one of the
first private Internet Service Providers1
(ISP) in India. On November 29, 1999, the company
announced that it would acquire the entire equity stake
of IndiaWorld Communications Private Limited for Rs.
4.99 bn. This was one of the first and the largest
dotcom acquisition2 in terms of deal amount
in India.
The
acquisition was done through an all cash deal3,
which had to be executed in two phases. In the first
phase, Sify had to acquire a 24.5% stake (49,000 shares)
in IndiaWorld for Rs. 1.22 bn, after the deal was
announced in November 1999. In the second phase, Sify
had to purchase the remaining 75.5% stake (1,51,000
shares) at Rs. 3.25 bn, in cash, before September 30,
2000. Sify also had to pay a nonrefundable deposit of Rs.
513 mn, which it would forfeit, if it 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 at Rediff.com4, "People
didn't believe that the value of the deal could be Rs.
4.99 bn. Some of us felt it was a wire agency
mistake." Financial analysts too were taken aback.
The question on everyone's mind wasDid Sify take the
right decision, investing Rs. 4.99 bn in IndiaWorld,
which had reported a net profit of Rs. 2.7 mn on
revenues of Rs. 13 mn in the financial year 1998-1999?
How did Sify arrive at a figure of Rs. 4.99 bn figure
while valuing the acquisition? What strategic and
financial benefits accrued to Sify from this
acquisition? Does it really make sense for Sify to
invest Rs. 4.99 bn for IndiaWorld's 0.2 million shares,
paying a whooping amount of Rs. 24,950 for each share of
IndiaWorld, which had a face value of Rs. 10? |
