Satyam Worried About Loss-Making Arms

After the successful American depositary shares (ADS) issue, the jubilant Satyam Computer Services is now worried about its loss-making subsidiaries which are eating away its bottomline. Even a significant portion of the ADS proceeds might be utilised to sustain these subsidiaries.

However, as per the ADS offer document, the company did not mention any specific investment into the subsidiaries from the issue proceeds. Out of the net mobilisation of $131.3 million from the offering, it has set aside approximately $26 million to repay the debt against a total debt liability of $53.14 million.

About $ 45 million was apportioned to fund the expansion of existing facilities and the balance $60.3 million is proposed to be invested in acquisitions, joint ventures and other strategic investments. The company is likely to get $20 million more, if it chooses to exercise greenshoe option.

According to company sources, Satyam Infoway (Sify), with its huge capital expenditure plans in the coming years, might require infusion of the ADS funds. In addition to its operating losses, Sify is contributing more to Satyam's losses with its frenzied acquisitions.

For the nine months ended December 2000, amortisation of goodwill expenses was to the tune of $13.9 million associated with the acquisition of content portals -- Indiaworld and IndiaPlaza. Apart from these and THE deferred stock option expenses, Sify had an operating loss of $38.9 million during the period.

As a result, Satyam had to post a net loss of $29.38 million under the US GAAP. However, the parent company feels that the cash and cash equivalents of $46.6 million as of December 2000 are sufficient to meet its current requirements till March 2002.

Sources said, "As of now, we do not expect to have to provide Sify with any funds. However, in light of the highly dynamic nature of Internet business, its capital requirements and sources may change and it may also seek financial support from us."

Meanwhile, Satyam might face another hiccup when the Government of Singapore Investment Corporation decides to exercise its put option to sell Sify's shares to Satyam. The corporation has bought 86,800 put options at a price of $36 per share in June 2000. The options are at a price equivalent to the average Nasdaq closing price during the three days before the exercise date of the options.

The options are discounted by 41 per cent if Sify does not complete an initial public offering in India by September 2001. If it is assumed that Sify's price stands at the current price of $4 per ADS, Satyam might have to shell about $3.3 million to the corporation if it wants to book losses on its investment.

Sify now seems to have realised its folly of acquiring the portals and is now concentrating on alliances with other portals to keep its business plans on the track. There is one possibility for Sify to raise funds on its own without a need to come out with an IPO in the domestic market.

The proposed hike of foreign ownership in the Internet companies to 74 per cent might help the company raise some funds abroad by diluting some equity. If this does not materialise, then Satyam has to come to the rescue by infusing fresh funds from the ADS proceeds or some other sources.

Satyam has six subsidiaries in India, US, Japan, Singapore and Europe. While those in Europe, Japan, Singapore and one in the US do not have much operations and thus did post minor losses for the nine months ended December 2000, two major subsidiaries, Sify and Vision Compass posted huge losses.