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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"This is the first time an Indian company has paid for a strategic value of this size to demonstrate leadership. People will realize this is necessary eventually."

- Rajeev Memani, partner at Ernst & Young.

"Valuing these high-growth, high-loss firms has been a challenge, to say the least; some practitioners have even described it as a hopeless one."

- Mckinsey and Company.1

A Landmark Acquisition

Established in December 1998 in Secunderabad (Andhra Pradesh, India), Satyam Infoway Limited (Sify) was one of the first private Internet service providers2 (ISP) in India.

On November 29, 1999, the company announced that it would acquire the entire equity stake of IndiaWorld Communications Private Limited at a huge amount of Rs. 4.99 billion. This was one of the first and the largest dotcom acquisition3 in terms of deal amount in India. The unique feature of the acquisition was an all cash deal,4 which had to be executed in two phases.

In the first phase, Sify had to acquire a 24.5% stake (49000 shares) in IndiaWorld for Rs 1.22 billion during the time of announcement of the deal in November 1999. The second phase of the deal gave Sify an option of purchasing the remaining 75.5% stake (151000 shares) at Rs. 3.25 billion in cash before September 30, 2000.

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Sify had to also pay a non-refundable deposit of Rs 513 million, which would be forfeited, in case Sify does not exercise the option.

The deal surprised stock market analysts and merger and acquisition gurus both in India and abroad. According to an employee at,5

"People didn't believe that the value of the deal could be Rs 4.99 billion. Some of us felt it was a wire agency mistake." Financial analysts too were taken aback.

The question on everybody's mind - Whether Sify took a right decision to invest Rs. 4.99 billion in IndiaWorld which had reported a paltry net profit of Rs. 2.7 million on revenues of Rs. 13 million in the financial year 1998-1999...

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1] Comment in Frontline magazine, June 23, 2000, on valuation of dotcoms.

2] A company whose network is linked to the Internet through a dedicated communication line. It offers other companies with dedicated communication lines to the Internet. It also allows individual users to dial up and access the Internet through its computers for a specific fee.

3] After the Sify-IndiaWorld deal, BFL Software Limited (BFL) acquired Mphasis Corporation (Mphasis) of the US in an all-stock deal worth Rs. 8.76 billion in February 2000.

4] The deal was structured by DSP Merrill Lynch who were the advisors for IndiaWorld during the sale of the portal.

5] Rediff was established in 1996 by Ajit Balakrishnan as a portal focusing on resident and non-resident Indians. It was listed on NASDAQ in June 2000. Rediff also offers a version of its site Rediff US targeting Indians living in the US.


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