With the IT sector sharply in focus after Satyam, news of Siemens India selling it's IT business to its German parent company Siemens AG has caught the attention of investors and analysts.

On 9 January, Siemens had announced the transfer of its 100-per cent stake in Siemens Information System Ltd. (SISL) to a fully owned subsidiary of Siemens AG.

Siemens Ltd had said in a media communique, that the decision to divest SISL was brough tabout by the change in structure of the global software business, where SISL businesses have also been aligned with the parent group.

In the new model, SISL will serve as an internal software factory supporting the R&D and product development initiatives for business sectors globally. It will also focus on increasing its presence in the domestic market and continue to act as an offshore development centre for Siemens worldwide.

Commenting on the development, Dr Armin Bruck, managing director, Siemens Ltd, said, "The transfer of 100-per cent stake of SISL from Siemens Ltd to the parent company is a part of the global strategy. This portfolio realignment will enable Siemens Ltd to further focus on core businesses of industry, energy and healthcare. At the same time, the integration of SISL with global operations will ensure that their developmental capabilities are harnessed most effectively for the Siemens global growth strategy."

Market unhappy with valuation of sale
However the market has not taken kindly to this sale'; in the three trading sessions, Siemens, which is part of the Nifty 50 index, fell by 30 per cent.

SISL was transferred at a valuation of seven times the EBIDTA at Rs449 crore. However, there had been a sharp fall in the profitability just of the software company before the transfer.

There have been rumours that the German parent, Siemens AG, plans to sell the global IT business. The transfer of the Indian IT subsidiary could be an attempt to consolidate all of the IT divisions before the sale.

Siemens defends the sale
Currently, about 70 per cent revenues of SISL are from captive business coming from the parent company, which decides the product development strategies and market focus. The global realignment meant that the business model changed from an 'entrepreneurial' to a 'factory' model to leverage India's cost advantage making it globally competitive.

This resulted in lower profit margins for SISL. For the year ended September 2008, Sales revenue for SISL were Rs994 crore with Profit Before Tax (PBT) of Rs73 crore as compared to Rs1,023 crore and Rs160 crore respectively for the corresponding period ended September 2007.

Therefore, the board approved the transfer of the SISL business in India to a subsidiary of Siemens AG at a price of Rs449 crore, as valued by Grant Thornton.

According to Dr Bruck, "The realignment of software business is primarily keeping in mind interest of our shareholders by separating out the low margin business and focusing on acquiring higher margin businesses that strategically fit the portfolio, as well as expanding capacities in our core sectors. Portfolio review is an on-going process to ensure market competitiveness and profitable growth."