Valuing Sify's Acquisition of Indiaworld

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Case Details:

Case Code : FINC031
Case Length : 15 Pages
Period : 1998 - 2003
Pub. Date : 2003
Teaching Note : Available
Organization : Satyam Infoway Ltd., Indiaworld Communications Private Ltd.
Industry : Software, IT, Finance
Countries : India

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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A Landmark Acquisition Contd...

How had Sify arrived at that Rs. 4.99 billion figure while valuing the acquisition deal? What were the strategic and financial benefits to Sify from this acquisition? Does it really make sense for Sify to invest Rs. 4.99 billion for IndiaWorld's 0.2 million shares which effectively worked out to paying of a whooping amount of Rs. 24,950 for each share of IndiaWorld with a face value of Rs. 10?

Some analysts voiced their concerns about the deal being grossly overvalued. Expressing his concerns, Manish Gunwani, a financial analyst at SSKI6 said, "There aren't too many popular Indian portals and IndiaWorld had a high profile. Even then, the valuation seems very stretched. It's based on what may happen, not on current realities."

Analysts also drew comparisons with the leading software company Infosys whose Rs. 10 paid up shares quoted at Rs. 9, 250 on November 30, 1999. Amidst all these concerns, Sify's CEO and managing director R Ramaraj (Ramaraj) was confident about the deal.

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He said, "The acquisition would be a good strategic fit to Satyam Info way's portal business adding a large overseas Indian audience to the large India based audience that currently 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, which an investor should pay to buy an equity stake in the company. The traditional methods for valuing firms were developed keeping in mind the companies in the brick and mortar sector. These companies had tangible physical assets as well as clearly defined sources of revenues. The traditional methods for valuing firms included the Discounted Cash Flow Method (DCF), the Economic Value Added (EVA) method, the pure play or comparable company approach and the multiplier method (Refer Exhibit I). Most of the traditional models for valuing a brick and mortar firm were based on publicly available financial figures...

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6] SS Kantilal Ishwarlal (SSKI) Securities Private Limited is a registered stockbroker in the Mumbai and National Stock Exchange.


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