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No immediate gain seen for Silverline from acquisition

NetScribes/Ganesh Ramamoorthy

After the euphoria, it's time for a reality check. Silverline Technologies is not seen benefitting from its acquisition of the US-based, Nasdaq-listed SeraNova Inc, at least in the short-term. Analysts blame this on the cumulative losses of the US company.

The markets also seem to agree. During afternoon trades on Monday, the Silverline scrip fell 8.2 per cent on the Bombay Stock Exchange (BSE) to Rs 294.45 from its previous close of Rs 320.80.

Though the Silverline management expects the acquisition to be acretive to earnings on a net operating margin basis, analysts say that given SeraNova's losses, Silverline may have to wait until the fiscal-end to get any income from its latest acquisition.

"The acquisition won't help in the short term," said Sagar Tanna, fund manager at Asit C. Mehta Brokerage, adding, the fall in the scrip confirmed this. "Also, with the second-rung management under-developed, the company will find it difficult managing the 2,600-odd employees of SeraNova post-acquisition."

Immediately after the acquisition, Silverline will have to face an equity dilution as well as a dent in its bottomline, he added.

Under the terms of the deal, the exchange ratio for SeraNova's shares to Silverline's ADR has been fixed at 0.35 - for every share of SeraNova, a SeraNova shareholder will get 0.35 ADR of Silverline.

The number of outstanding shares of SeraNova stands at 17.47 million shares on Nasdaq. Going by the exchange ratio, Silverline will have to issue fresh equity to the tune of 6.11 million ADRs to SeraNova shareholders. Silverline has a total of 32.25 million outstanding shares on the NYSE.

"The equity dilution is a cause for concern as Silverline has been diluting its equity very fast," said an analyst at a Mumbai-based securities firm. The number of outstanding shares of Silverline went up from 38 million in FY99 to 65 million in FY2000. Paid-up equity capital went up from Rs 349 million in FY99 to Rs 732 million during the first half of 2001.

Besides equity dilution, analysts are also worried about SeraNova's contribution to Silverline's bottomline. SeraNova reported a net loss of $1.81 million on gross sales of $19.81 million for the quarter ended June 30, 2000. It is expected to announce its September quarter results on November 6, 2000.

"Silverline will have to absorb SeraNova's losses, which will pose a problem for it in the next quarter," the analyst said.

Tanna, however, said the acquisition will help Silverline gain access to the Internet technology area and add value in the long term. "SeraNova has an impressive list of clients, which will benefit Silverline in the long run. Also, the fact that it is an all-stock deal with no cash outflow is very positive. So the premium Silverline will pay for the acquisition is very small," he said.

The acquisition of SeraNova for $99 million, advised by Salomon Smith Barney, will create a combined entity with revenues worth $175 million and over 2,600 e-business and enterprise systems professionals as on June 30, 2000, Silverline said in a statement.

Silverline is currently trading at a P/E of around 32 times its FY01 earnings. The stock has come down substantially from its 52-week high of Rs 1,395 to a new 52-week low of Rs 261.50 during the last three weeks.

Analysts say that with very few upsides, the scrip's future movement will depend largely on the market sentiment and the company's ability to move up the value chain and maintain its quarter-to-quarter revenue growth.

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