Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

More on Siemens

I have not so far been posting links to my TV interviews though
these days, videos and transcripts are often made available on the web
sites of the TV channels. I am beginning to remedy that by posting
links to the video
and transcripts
of an interview of January 15 on CNBC about the Siemens story that I
about two days earlier.

Some excerpts from the interview:

It doesn’t look fair at all – both the valuation and
the entire manner in which it has been done. First of all, looking at
the valuations, an IT firm being sold at six months of revenues looks
quite absurd. We have the mainstream IT stocks trading at something
like 2-3 times revenues, and this is half a year revenues, even by
price earnings multiple, which looks very low about half of what
mainstream companies sell at.

The other part of the problem is the process by which it is being
conducted. The day Siemens announced that they were selling; they said
nothing about the valuations, they said nothing about the financial
performance of the subsidiary. Couple of days later, after all hell
has broken loose, they come out with details about this and the
information, which they disclose is even more troubling. It even gives
an impression that the financial performance has actually been turned
down – the revenues have fallen, the profit margin has collapsed and
there is a situation in which somebody could give a low valuation to
the stock.

The entire process looks really bad and when one looks at
Satyam-Maytas, at least, on day one, they told us what the valuation
was. Here on day one we were told nothing about the valuation, it is
really troubling.

When you are talking about something which is really captive, the
margin is entirely a function of transfer price. To believe that the
kind of IT that Siemens does, they are really into relatively high
value IT, and to believe that the profit margins are so low it strains
credibility. Moreover, these are not third party prices; these are not
arm’s length prices; these are internal transfer prices.


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