New player in global investing: India Inc.

From hotels to high tech, Indian firms aim to boost their status in key foreign markets.

India Inc. is going global.

After years of staying safely within their own borders, Indian firms are venturing beyond the subcontinent with conviction, looking to become the Sonys of the next century.

The August announcement that Indian megaconglomeration Tata spent $677 million for a 30 percent share of Energy Brands, which makes Glaceau Vitaminwater in the United States, was a signal flare. Now, Tata is prepared to pay $9.3 billion for a Netherlands-based steel company, while India's Videocon has reportedly made a$700 million bidfor South Korea's Daewoo Electronics.

By the standards of global mergers and acquisitions, it is still relatively small-time stuff. But for India, it is an utterly new adventure in capitalism – one that many experts suggest is merely the initial step down a road that Japan, Taiwan, and China have trodden, as Indian brands emerge from the obscure onto drugstore shelves and showroom floors from Spain to Singapore.

"As reasonably large economies become a part of the global trading system, they become international brand names," says Adil Zainulbhai, managing director of the consulting firm McKinsey & Company in India. "We fully expect to see a fair number of Indian companies doing that, and this is just the leading edge."

The range of ventures is broad. The everpresent Tata group has bought the Pierre hotel in New York for its Taj hotel chain and is in the process of buying the Ritz-Carlton in Boston – the oldest continuously running Ritz-Carlton in the US. After a string of smaller purchases, Indian pharmaceutical company Ranbaxy recently acquired Romania's Terapia for $324 million. And Bangalore's United Breweries has put in a bid reported to be in the area of $750 million for Scottish whiskey distiller Whyte & Mackay.

So far in 2006, Indian firms have spent $7.5 billion abroad, compared with $4.5 billion in 2005 and $1.5 billion in 2004, according to Dealogic, an industry tracking firm. The simple reason is that Indian companies have more money to spend. While the growth in the domestic market here has helped, international investors have provided the real fiscal fuel. Investors are looking to put their money into companies with high growth potential, leading many to Indian firms. As a result, stock prices for Indian companies are consistently valued three to four times higher than Western ones with the same revenues. That gives them disproportionate buying power.

It also acts as a dinner bell for venture capitalists seeking the next big thing. US private-equity firm Ripplewood Holdings is teaming with Videocon in the ongoing effort to buy Daewoo Electronics, and Sequoia Capital helped Hyderabad-based AppLabs Technologies become the world's largest software-tester. It purchased Britain's IS Integration for $37 million.

"For companies in India, this is the first time that we have gotten access to real capital," says Sashi Reddi, chief executive officer of AppLabs.

For Mr. Reddi, the acquisition was a matter of expanding AppLabs's territory and reputation. "We don't want to be seen as a purely offshore player," he says. "We needed to have a stronger presence in our target countries."

The reasons for the expansion of India Inc. are many, and vary from company to company and sector to sector. Tata steel is trying to establish its place in a rapidly consolidating business. Taj hotels want to create a brand name abroad. And United Breweries is just trying to keep up with India's increasing thirst for whiskey.

Underlying all, however, is a new desire to have a greater stake in global economy. As recently as the 1990s, India's economy was so tightly held by the government that Indian entrepreneurs had to get the permission of the federal reserve bank every time they left the country.

"There is a sense that India needs to go overseas to capitalize on these brands and capitalize in these markets," says Anuj Chande of Grant Thornton accountants, who has advised Indian companies.

Yet the growth of India Inc. isn't likely to be a reprise of the era when "Made in Japan" began to appear on everything from refrigerators to TVs. When it comes, an Indian invasion will likely come softly.

Indian automakers are first venturing into less competitive car markets such as Spain and Italy. Indian banks and telecoms are looking at the US and Britain to appeal to Indians living abroad. Only after they establish themselves among those familiar with their brand name will they expand, says Saikat Chaudhuri of the Wharton School in Philadelphia.

"It's not going to be a direct assault on the US market like it was with the Japanese," he adds.

Moreover, India's greatest potential strengths lie in less obvious ventures – particularly in engineering-intensive activities like information technology and pharmaceuticals. India's IT is already a world player, so it is loath to shackle itself to the demands of big foreign firms.

"They're hesitant because the partners available are deemed incompatible – the other side would probably expect equal profit sharing," says Professor Chaudhuri. "They're building expertise through other smaller deals."

In some respects, this is wiser. Of the 15 largest Japanese acquisitions in the 1980s, four were successful, says Mr. Zainulbhai. "Sixty to 70 percent of acquisitions don't return the cost of capital," he says.

Yet India could face unique problems. Some say the Videocon deal has stalled because Videocon is following a deep-seated Indian tradition – it is haggling too much.

India also has a tradition of family ownership. Zainulbhai cites a profitable jewelry firm that had only four stores – because it had only four family members to run them.

With the latest figures of an 8.9 percent growth rate for India, there are likely to be many opportunities in the future. "There is huge potential," says Zainulbhai.

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