8/14/2019 Anomalies While Valuing Technology Firms Using Traditional Models
1/35
About Sify
Established in 1998
First ISP in India with a subscriber base of 0.1mn in 30 cities.
Portals:
satyamonline.com
Walletwatch.com Carnaticmusic.com
Carstreet.com
Approx 13 mn page views per month
8/14/2019 Anomalies While Valuing Technology Firms Using Traditional Models
2/35
About India World
Established in 1994 Provided web based solution Major portals:
Samachar.com
Khel.com Dhan.com Bawarchi.com Khoj.com
Approx 13 mn page views per month
Earning profits consistently for three years For FY 1998-99 :
Revenues:Rs.13 mn PAT: Rs.2.7 mn
8/14/2019 Anomalies While Valuing Technology Firms Using Traditional Models
3/35
The Acquisition
In Nov 99 Sify announced acquisition of IndiaWorld
Per share value of Rs.24950 paid.
All cash two phase acquisition valuing Rs.4.99 bn 24.5% stake in IndiaWorld for Rs 1.22 billion during the
time of announcement of the deal an option of purchasing the remaining 75.5% stake at Rs.
3.25 billion in cash before September 30, 2000 by payinga premium of Rs 513 mn
Second phase later modified to cash + stock deal
with Rs.2.15bn in cash
8/14/2019 Anomalies While Valuing Technology Firms Using Traditional Models
4/35
Acquisition Synergies
Large overseas Indian customer base of
IndiaWorld
Big Brand Name & Visibility Highly popular web sites
Providing total internet solutions
8/14/2019 Anomalies While Valuing Technology Firms Using Traditional Models
5/35
8/14/2019 Anomalies While Valuing Technology Firms Using Traditional Models
6/35
Cont..
Lack of information regarding firm of
similar size for comparable valuation
technique to be utilised by analyst .
8/14/2019 Anomalies While Valuing Technology Firms Using Traditional Models
7/35
Analysis of Price paid and synergies
The price paid was a P/E multiple of 8237 times
which was very high for a technology firm
The company had to grow at 11.97% till
perpetuity at 12.5 % WACC to justify the pricewhich is highly unrealistic .
The sensitivity analysis suggests that the
company needs to grow 31% annually to cover
the WACC of 31.5% to justify the amount paid .
8/14/2019 Anomalies While Valuing Technology Firms Using Traditional Models
8/35
P/E Ratio Analysis
The price earnings ratio is not applicable forthe years 2000-01 and 2001-02 particularlyon account of the fact that Indiaworld has
had negative earnings during those twoyears.
The price to sales ratio of Sify has shown adramatic decline in the next two years
indicating that the firms price to sales ratiowas inadequate.
8/14/2019 Anomalies While Valuing Technology Firms Using Traditional Models
9/35
Strategic fit
Sify had made forays into the domestic
market and was catering to Indian clients.
India world was on the other hand catering
to a variety of foreign clients .
However, its expectations have been
belied particularly on account of the fact
that India World has sustained hugelosses in 200-01 and 2001-02
8/14/2019 Anomalies While Valuing Technology Firms Using Traditional Models
10/35
Cont..
The revenues of the firm has increases by 100%
in 2001 but has been accompanied by a 100%
rise in cost of service
The company has suffered huge increase in costof service, operating and general expenses and
marketing and promotion expenses
The revenues have risen due to marketing efforts
and not on account of expected synergies
8/14/2019 Anomalies While Valuing Technology Firms Using Traditional Models
11/35
Dupont Analysis:
The Dupont analysis conducted shows that in
the year of acquisition the company had ROE
of 47% which may have caused the investment
bankers to value a high price of the company Sifys nearly threefold increase in operating,
Administrative , personnel and marketing
expense coupled with no synergies has resulted
in the company suffering huge losses
8/14/2019 Anomalies While Valuing Technology Firms Using Traditional Models
12/35
Page view multiplier model:
At the acquisition price the market value per
page view is a 31.99 for India world much
higher than Sifys 14.23 .
Revenue per page view is pretty low at 0.15which indicates that there is a pretty low
conversion rate in terms of revenue
A high market value per page view with lowrevenue per page view creates anomalies in
the valuation process.
8/14/2019 Anomalies While Valuing Technology Firms Using Traditional Models
13/35
Cont..
Valuation of the Price/ Revenue multiples hasbeen done considering three scenarios:
Scenario 1: This considers the market value ofSify as proxy for market value of Indiaworld.This is highly unrealistic on account of the factthey are not comparable companies in terms ofrevenue, asset base or otherwise.
Scenario 2: Using the preacquisition price asproxy price for India world.
8/14/2019 Anomalies While Valuing Technology Firms Using Traditional Models
14/35
Cont..
Scenario 3: Using the book value of equity as proxy for
the market value.
The price revenue multiple varies from 3.3 to 202 to.25for scenario 1, 2 and 3 respectively. Moreover if Sify
price is used as a proxy for the price of India world, the
valuation of the company is at 83.03 million which is
much lower than the 4.99 billion paid
8/14/2019 Anomalies While Valuing Technology Firms Using Traditional Models
15/35
Some points to note Uncertainty brings with it its own set of problems
Valuation of companies with volatile and negativeearning s need to be done cautiously
Too high a price should never be paid forcompanies not having a high asset base or a
proven track record Market might over hype value and sales but is
ultimately a great leveler as was witnessed in thedotcom crash that followed.
It is not prudent to acquire firms during bubble andmarket abnormal returns might not always be agood indicator of performance.
8/14/2019 Anomalies While Valuing Technology Firms Using Traditional Models
16/35
Sify ADS Analysis
Revenue per share for Sify post merger showsthat it has increased at an average growth rateof 20% which is pretty low. The growth rate willhave to be much higher if the high price is to
justify itself.
price by revenue multiple has fallen downsubstantially from 2536.38 in March 2000 to23.11 in September 2002. The fall has been onaccount of decline in prices of the shares (ADS).
Prices of shares have dropped from 210.52 to4.28 in the same period.
8/14/2019 Anomalies While Valuing Technology Firms Using Traditional Models
17/35
Cont Price paid prior to the dotcom burst was
unreasonable and irrationally higher for the two
companies
The earnings that were estimated post merger for
Sify and Indiaworld was too high. The price revenue ratio has come down from the
dizzying heights as the stocks of Sify post
acquisition of Indiaworld has failed to delver .
The average fall in price per quarter over the last 3years has been 7%.
8/14/2019 Anomalies While Valuing Technology Firms Using Traditional Models
18/35
Valuing non-dotcom firms
Traditional methods:
DCF
EVA
Comparable Firms
Multiplier Method
Based on historical and current earnings
and other tangibles
8/14/2019 Anomalies While Valuing Technology Firms Using Traditional Models
19/35
Limitations
Tangible physical assets include web
servers, some equipment and office space
Lack of sufficient historical data to project
future cash flows
Very few comparable firms
No well defined profitable revenue Negative earnings sometimes prevents
forecasting
8/14/2019 Anomalies While Valuing Technology Firms Using Traditional Models
20/35
Valuation Factors for dotcoms
Internet traffic
Market size
Features of web site Competition
Replicability
8/14/2019 Anomalies While Valuing Technology Firms Using Traditional Models
21/35
Valuation Models for Dotcoms
Valuation using page views as a multiplier
Valuation based on quantifying qualitative
factors
Modified DCF Model McKinsey & Co.
Damodarans Model
EVA Model Other Models
V l ti i i
8/14/2019 Anomalies While Valuing Technology Firms Using Traditional Models
22/35
Valuation using page views as a
multiplier
Parameters needed to measure the price per page view of adotcom viewer- Market Capitalization Value
- Page Views
- Revenues Earned
- Calculate Market Cap- Determine avg daily page view
- Calculate Market value per daily page view
- Identify revenues per year
- Calculate revenues per page view
- Calculate price/revenue in terms of page view
Val ation based on q antif ing
8/14/2019 Anomalies While Valuing Technology Firms Using Traditional Models
23/35
Valuation based on quantifying
qualitative factors
Three basic factors for valuation are
- Management
- Market Segment- Manner in which funds are invested
8/14/2019 Anomalies While Valuing Technology Firms Using Traditional Models
24/35
Modified DCF Model McKinsey & Co.
Three changes made to traditional model:
Determine the state of the industry and company in future
when it had achieved a sustainable and moderate growth
rate
Work backward and estimate the current performance
Future financials predicted for a range of scenarios
D d M d l
8/14/2019 Anomalies While Valuing Technology Firms Using Traditional Models
25/35
Damodarans Model
Based on cash flow generated by a firm
Two stage growth high growth period followedby stable growth
Parameter required
- Growth rate in revenues
- Length of high growth period- Capex, depreciation, and working capital during
high growth period
-Expected growth rate during stable period- Cost of capital
- Beta of comparable firms to be used
8/14/2019 Anomalies While Valuing Technology Firms Using Traditional Models
26/35
EVA As A Valuation Tool
EVA Valuation is extension of the DCF valuationapproaches
The total value (debt + equity) of business could beexpressed in EVA terms :
V = (Total Invested Capital)t0 + ((EVAt) /(1+Kwacc)t)
Total Invested Capital = Current Cumulative Level ofInvested Capital
EVA = (Adjusted NOPAT) (Capital Charge)
Capital Charges = (Periodic Invested Capital) *Kwacc
8/14/2019 Anomalies While Valuing Technology Firms Using Traditional Models
27/35
Other Valuation Models for Dotcom Cos
Value per Customer : The value of eachcustomer to the firm is:
VX = Summation (CFX/ (1+r) ^t)
where : CFX - cash flows generated per year
R - discount rate which can range from theriskless rate, if the customer has signed contracts
for n years to remain as subscriber or WACC.
T No.of years
8/14/2019 Anomalies While Valuing Technology Firms Using Traditional Models
28/35
Cont..
Value of the firm = VX*NX
where : VX Value per customer
NX Number of Customers
If the firm decides to add the subscribers at a growth
rate, then there will be a cost of advertising and
promotion C for each period . Then the value of firm
will be =
(NX*VX) + Summation (NX (VX-C)/ (1+k))
8/14/2019 Anomalies While Valuing Technology Firms Using Traditional Models
29/35
Cont.
Value per subscriber: For firms which rely onsubscribers for their revenue, the value of thefirm can be determined for comparable firms as
(Market value of Debt + Market value ofequity)/Number of subscriber.
This multiple of comparable firms could be usedto calculate the market value of the concerneddotcom.
8/14/2019 Anomalies While Valuing Technology Firms Using Traditional Models
30/35
Cont
Value per customer: Firms which rely on retailcan determine value per customer ofcomparable firms as:
(Market value of Debt + Market value ofequity)/Number of customers
This multiple of comparable firms can be usedto determine the market value of theconcerned dotcom.
8/14/2019 Anomalies While Valuing Technology Firms Using Traditional Models
31/35
Cont
Value per site visitor: Such can be calculated
as:
(Market value of Debt + Market value ofequity)/Number of visitors to the site
This ratio could be used to value the company
8/14/2019 Anomalies While Valuing Technology Firms Using Traditional Models
32/35
Optimum Valuation Method
no single method is adequate to valuedotcom company particularly one which hasno proven track record and facing an
uncertain future
Each and every method has its own pitfallswhether DCF, comparable methodology or
specific sectoral multiples. The most idealmethod to value a dotcom is a combination ofeach of these methods
8/14/2019 Anomalies While Valuing Technology Firms Using Traditional Models
33/35
Cont.
Assumption: the stock market is efficient ie. all
factors relevant to a stock are incorporated in the
stock price
The stock market valuation is used as Y for this
purpose: All other relevant methods including, the
DCF, EVA, comparative methodology and sector
specific multiples are considered to beindependent variables
8/14/2019 Anomalies While Valuing Technology Firms Using Traditional Models
34/35
Cont.
Using these, for a set of similar companies in theindustry Discriminant analysis is run to obtainthe weights for each of the independentvariables
The weights obtained from analysis are thenused for the valuation done by different methods
for the concerned dotcom and the final value ofthe stock is determined.
8/14/2019 Anomalies While Valuing Technology Firms Using Traditional Models
35/35
Thank You
Top Related