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Acquisitive Silverline

Nov 17, 2000

Silverline has adopted the acquisition route to boost its future prospects. However, if one were to compare the price/revenue ratios for the various acquisitions, it seems that the price paid by the company seems to be on the higher side. Silverline Technologies began its journey of acquisitions with the Toronto based CIT, Inc., an international e-business solutions and services company. CIT, which has a revenue base of US $ 6 m, provides responsive Internet/Intranet solutions to Fortune 1,000 companies. This acquisition provides Silverline with several immediate benefits such as a greater presence in Canada and the Middle East, as well as a broad range of experience in Java Enterprise Architectures. This will enhance Silverline's ability to deliver advanced Internet and e-business solutions.

Name of the co. acquired Size ($ in m) Price/Revenue Acqn. Date
CIT 7.0 1.2 Apr-00
TIS - 6% stake 12.5 1.5 Aug-00
SCI 22.0 0.9 Oct-00
SeraNova 99.0 1.4 Oct-00

The company’s next takeover was TIS Worldwide. It acquired a 6% strategic stake in TIS, an e-business solutions integrator in August 2000. TIS’ expertise in delivering e-business solutions, using its off-site development model, combined with Silverline’s back-office development and deployment strengths, will enable them to co-ordinate on a global basis. The acquisition is expected to bring revenues of around $25 m in the next three years to the company.

In October 2000, Silverline acquired one of its largest customers, Sky Capital International (SCI), an IT consultancy company, for US $ 22 m in an all cash deal. Silverline has thus established its presence in the Asia Pacific region by acquiring the Hong Kong based US $ 24 m company (SCI). This will enable Silverline to have a direct access to over 50 existing SCI customers in Hong Kong and Japan.

Finally, the company made its biggest move yet by agreeing to acquire US based SeraNova Inc. for US $ 99 m in an all-stock deal. SeraNova is involved in the design and implementation of Internet based software applications. Silverline expects the acquisition to build strong synergies between the e-business capabilities of SeraNova and the low cost delivery model of Silverline. The combined entity will also have the largest sales and delivery infrastructure in the US. SeraNova, however, carries accumulated losses and outstanding loans from its parent amounting to $ 29 m. Two customers (American Express and Volkswagon) account for around 54% of revenues. Thus, the risk from client concentration is high and a loss of any one client will have a significant impact on its financials. The company had earned revenues of $36 m as on December 1999 and is projecting to earn $72 m for the current year. Keeping these factors in mind, one feels that the price paid by Silverline (1.4 times forward earnings of SeraNova) seems a bit high.

The key question here is whether Silverline will be able to generate incremental returns on the amount invested by it in these companies. Of course, the more immediate concern would be whether or not the company is able to successfully integrate the various organizations/cultures.

At the current market price of Rs 287, Silverline is trading at a P/E of 10 times its September quarter annualised earnings.

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