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Valuing Sify's Acquisition

of IndiaWorld
Th!

VS

Mlrthy

case Provides details of Sify's acquisition of lndiaWorld'

including the structure of the deal, its Perceived synergies and


the criticisms leveled against the huge amount Paid for the

acquisition. lt 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.

This is tlre

frsr

time

at

Indian conrparry hzs paiA fot 4 strategic value of this size to demorctrate

Ieadership. People wiII realQe chis

necessary evmtually

Raieev Memani, Parne4

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,

lggg, the company announced that

it

would acquire the entire equity stake of Indialuorld


This was one ofthe lirst and the largest dotcom

for Rs. 4.99 bn.

Communications Private Limited


acquisition2 in terms of deal amount in

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-

.-;"""" *h.t" ***k

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

d"J,caicd c"mmunicariun lincs to the Interner.

:
r
I

through its comptrters for a sPccific fec.


(Mphasis) ofthc US in
Afrcr thc SitlndiaWorld deal, BFL Software Limitcd (BFL) acquircd Mphasis Corporation
an all-stock dcal worth Rs. 8.76 bfl in Fcbruarv 2000'
Thc deat was srructurcd by DSP Mcnill Lynch, who wcrc advisors to lndia\qorld during thc salc ofthc portal.
Rcdtffwas cstablishcd in 1996 by Ajit Balakrishnan as a portal frrcusing on rcsidcnt and nonresident Indians k was
listcdon thc NASDAQ inlune ?000. Rediffalso oficrs RcdiffUS, aversion ofRedif{ tarscrine Indians livinA in thc US.

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.

Exhibit l: Traditional Models for Valuing Companies

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

Where cF represens :n.

deductingthein\esi-e_::^:::':l--'_jii]igeneratingtheneededcash,ilows-fhefreecashflowis
(WACC)olthe
ciiscounled,
company.

usingac::.:--:-::: ' - :- : ;::allr

ihe Weighted Average Cost of Capital

Cost Method

Thi(

is considerea

a^ -_!a

:-:'

; _-:::_:, :i;Jme that the companies to

Economic valrF

{ddac F\ \

-':
Cose Fal.:

-'-"r

ICiJR

be valued are not going

expecred growth rate of a dorcom firm. Given the difference between


dotcoms and B & M firms,
a different model was needed for valuarion ofdotcoms.
some analysts felt thar dotcom valuation must be basedon Inrcmet
me.,ics such as the volume
Interner traffic and their conversion to potential revenues. Though
iie initial cash burn rate6
for dotcoms was higher, they were also expected to generate proftts
a"t a iuch high., gro*th ."t
than traditional ffrms. Some analysts were of the opinion th"t th" most
important asset for any
dotcom company was its customer base, Hence, they argued that
the valuation should be based on
a cbmpany's abiliry to increase its cusromer base and increase
revenue generation, Other key
factors that influenced the varuation ofdotcoms were the size
ofthe maiket in *nich the dotcom
was operating, features of the dotcom's website, compedtion in
the indusFy segment and so on.
For the accurate valuation ofdotcoms, tradirional meihods ofvaluadon
neededio be modiffed to
include the abovc paramerers (Refer Exhibit II). Expressing the problems
in varuing dotcoms,
McKinsey and Company? commented, ,,Valuing these
growih, high loss firms - b""r,
- - --- challenge, to say the least; some practitioners have e.r.r,'igh
der.ibed it'as i hop"L6 o.r".;
<.rf

i",

Commenr in Frundne magarine, June 23, 2000, on valuation ofdotcoms.

\i:e - g.:a -!<, :-. Company


i:: :1 _ :''_: c iscounted
McK jn5ey -..j <;::-:: . -:,:
Modified DCF

cash flow approach to valuc a dotcom company

:- :__:::-: : -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

basedon a '..:.r.:--. -=:'-::-.aniesbelongingtotheoldeconomy The most difficult aspect of


valuation a. - -, - -a'-- '-:-_: ::::arios to current performance. This had to be based on strong
fundamer= :-: .: : :' :.::- : :'- :s v'ell as ihe industry The analysis helped in identifying key value
driversor:'- r.--:.:_:-:::::rCeterminetheearningsthatafirmmightgenerate

The cost of capital of the firm, to discount the cash flows,

The steps involved in th valuation of the company are:

Adapted ftum

f he Datk

Side of Valuation by AJ hwar'ih

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

{otci;m stock tradcd on a US stock exchangc.

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 -:

for informatior .links to var oui :

: : :r--,:rual con-sert ofholh Sify ancl lndia\Vorlc1.


1ht-,
ca.L--: :
.

- .: : :::. s a.l\'isorv l.oard, rvhici-r rvas responsible

Sify planned to integrate IndiaVorld's numerous websites into its


own portal,
subr.riL, b^re ir, .*.ess

www.satyamonline.com. In 1999, SiS' was one of the largest ISR


with a

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.

silr could have invested the

The Valuation Debate


Though analysts agreed on the benefits.that would accrue to sifo fiom Indiaworld,s
acquisition,
they were divided over the valuation of the deal. some expera iert
thua ,t. uutu. or" lo-p"rrv
varied dcpending on the buyer. For example, a strategic buyerro could
be wllhng to pay a hi;h;r
price for a company compared to a ffnancial buyerr,
argued that sify had acquired Indiavorld for srrategic reasons. They
said that
would be a perfect complement to Sily's websire. The deil would
all"* Si6, ; .;;;l;
cross-selling opportuniries within its own portal and ISp service and provide
,."ay
io'ii.
exisring cusromer base and contenr of India!7orld's portal. Indiari7orrd
""..r, largest
was the second
portal in India in r999. They felt that sifi was followin! a strategy similar
to that used by Am"iica
online (AoL) in the US. AoL had consistently acquired leadin-g'content and seruice prouide.s
io
rctain its customers.

,IndiaVorld
-Analysts

A stratcgic bqcr rcfcru t. r"

".qri..r.h. b"y;@

capiralisr who gencrally invcsa in a dotcom ,cnture in its carty


stagcs and is
ofthe grcatcr risk involvetj.

1.1:l,a'll::lll:l:
unlvilling ro pay a l:l:::-to,a_vc.nturc
hishcr price bccause

Exhibit V: lndiaWorld's Financial Statements


1999.2000

Parliculars

Rs.

(in

Profit and Loss Accounts


2000-2001

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

Marketing arr t:ai-:: ar :\genses


Emplo)ee Re|. i-_:_::':_ Seneiits
Depreciatrcr

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

(in Rs. mn)

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

Annual Repofts 20a0' 2001, 2002

--, .....p"ntof".t

in*srmcnt banking scrviccs, venture capital

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

at ICFAI Center for Managemett Research.

References

l.
2.
3.
4.

Charles Assisi, Sctycm Ptcl<s


November 29, 1999.

llp 24.5% stale in Initiawoid,

tor

$2g mn, Businessworld,

to Acquire IndiaWodd forRs.499 cr, Indian Ex press, Novanber 29, 1999.


Maura Gint1, Satyam to Buy lndiaWo d intemetnews.can, Nooember 29, 1999.
Sc;tyom

GeorgeMatllew ad.Davechosterjee, satyamDeol


Cost, indianexpress.com, December 1, 1999,

-ln

vstors

swbalakrutHip1,,AcqaisitiotL

5.
6.

Prcrodrll^iJtqdrPric
vist anatlror filg,*ilFrrdrY-r

llid,

Asir-rlErh,Afe

Sfusfur

&rsinessworld, Decenber 1 3, 1999.

ld&raioa,

Business world,December

27, 1999.

7.

8.

Charles

k*r.tie4

Financial Express, January 8,

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-

undersond ft fobjective of fi3


models

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