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SeraNova deal buoys Silverline

NetScribes/Ganesh Ramamoorthy

Silverline Technologies' $99-million all-stock acquisition of US-based SeraNova Inc is set to create a $175-million entity with over 2,600 e-business and enterprise systems professionals.

Based on SeraNova's closing price of $4.4375 on Thursday, the company's market value works out to $77.48 million for a total of 17.46 million outstanding shares on the Nasdaq. Comparably, Silverline's market capitalisation on the New York Stock Exchange works out to more than $580 million. Silverline closed 11.4 per cent higher at $15.875 on Thursday, the day the company board met to consider the acquisition.

While the immediate reaction to the acquisition seems positive on the markets, analysts expect the actual implications to sink in only after considering SeraNova's financial position in the quarter ended September 30, 2000.

SeraNova's release of its financial results for the third quarter, previously scheduled for October 31, will now be done on or before November 6. The company incurred a loss of $1.81 million on net sales of $19.84 million in the half year to June 30, 2000. Silverline, which is slated to announce its results on October 31, has said the acquisition would be immediately accretive to its net operating margin.

Marketmen are worried that Silverline is diluting its equity way too fast. At the end of the 1998-99 fiscal, Silverline's outstanding shares stood at 38 million, while by the end of 1999-2000 it had grown to 65 million. And with this all-stock deal, the equity is expected to be diluted further. At the current BSE price of Rs 320.80, Silverline's price-earnings multiple works out to 29.38 times its 1999-2000 earnings.

On the NSE, the Silverline scrip surged past the 8 per cent upper circuit limit to close at Rs 319.95 on Friday, amidst substantial volumes of 7.69 million shares. On the BSE, Silverline was up 3.28 per cent at Rs 320.80 amid volumes of 4.99 million shares.

The stock has come a long way down from its 52-week high of Rs 1,395. Analysts say that the company's future valuations will depend on its ability to move up the value chain and maintain quarterly revenue growth.

This deal follows Silverline's acquisition of Hong Kong-based Sky Capital International for $22 million in an all-cash deal at the start of this month. Silverline had raised about $125 million through its ADR float on the NYSE, primarily for working capital needs and acquisitions.

Silverline, which provides a broad range of services, including application development, migration and maintenance, and e-business solutions, will have offices in 12 countries spanning the globe following the SeraNova deal.

Under the terms of the deal, for every share of SeraNova an investor would get 0.35 shares of Silverline ADS. The two companies expect the transaction, which was advised by Salomon Smith Barney, to be approved by both companies' shareholders and regulators by the beginning of 2001.

Raj Koneru is the chairman, chief executive officer and president of SeraNova.

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