IT `deals’ now show chinks in valuations

The Rs 475-crore takeover of Zap Infotech (which was an unlisted company) by Sun Infoways had also raised eyebrows. “The deal was touted as the second largest M&A deal in the Indian IT sector after Satyam Infoway’s Rs 499-crore acquisition of Indiaworld. Investors are not clear how Zap was valued,†said a shareholder. In fact, the sudden merger of Zap with Sun had surprised investors as ZAP promoter had gone on record earlier saying that “it would be listed on Nasdaqâ€.

Part of the Rs 475 crore was paid by Sun Infoway in the form of 25 lakh shares to Zap’s promoters, the Mithanis, at a price of Rs 850. However, Sun share is now quoted Rs 420 on the stock exchange on Wednesday a 23 % fall from Rs 546 recorded on the day the deal was announced a couple of months ago. For Zap promoter, it’s a 50 per cent paper “loss†when compared to the purchase price.Said a shareholder, “something is definitely wrong with the share prices of such IT companies and their valuations.†Sun Infoways, for example, was quoting at just Rs 10 a few months ago, but zoomed to Rs 724 later this year, and then the merger with Zap took place.

The first mega “takeover deal†in the ICE sector has also started taking its toll. With losses mounting Satyam Infoway which acquired IndiaWorld for Rs 499 crore last year and shook the dotcom world has seen its ADR (American Depository Receipt) price on Nasdaq falling to its all-time low of $5.1 on the Nasdaq last week.

Satyam Infoway had revealed a loss of Rs 61.489 crore ($ 13.51 million) for the three months ended September 30, 2000. Compared with the first quarter, the results also point to a huge jump in amortization costs weighing down second quarter figures. Company sources admitted that amortization charges were “mainly related to goodwill recorded in the acquisition of IndiaWorld.†Satyam Infoway’s losses are weighing heavily on its parent Satyam Computer.

It was free for all on the valuation front but companies will have to pay for their high valuations. There is apparently nobody to monitor the valuation of infotech companies. While market regulator SEBI has set up a panel to study dotcom valuations, it has not yet come out with its final report. This is despite the fact that the shakeout in the dotcom sector has entered the final phase and venture capitalists and promoters lost funds in unviable dotcom.

Certainly, the days of overvaluation are over. Albion’s total sales stood at $27 million (as on March 2000), but SSI paid the company $63.65 million. The Satyam deal has already misfired. As a merchant banker put it, “IT companies cannot take everybody for a ride all the time in the name of high valuations, mergers, expansion and takeover.†Nasdaq which had fallen 23 per cent in November has not yet stabilised. This means more skeletons will come out of the valuation cupboards.

IT to touch $100 bn

NEW DELHI:Minister for Information Technology (IT) Pramod Mahajan said today that at the current rate of growth the Indian Infotech sector is poised to touch $100 billion over the next few years. “The Indian IT sector is expected to reach the 100billion mark over the next few years and the greatest benefit of the Infotech tool would be that of wealth creation,†Mahajan said.