Foreign interest: i-flex is one of the many Indian firms to attract foreign investment

In late 2005, Vodafone's CEO, Arun Sarin was in New Delhi to announce his company's deal with Bharti Tele-Ventures, India's largest telco. To most people, it was not entirely surprising since India had been on Vodafone's radar screen for a while and there was really no way the global telecom major could afford to ignore the world's fastest growing telecom market. What eventually stunned the market was the size of the deal-Vodafone acquired 10 per cent in Bharti for an eye-popping $1.5 billion. The deal was struck at around Rs 370 per share even as the Bharti stock was hovering around Rs 350 (it is now quoting at around Rs 544). To Sarin, the India story was imperative as a part of Vodafone's long-term story and Bharti seemed the best bet.

Less than a year before the Vodafone-Bharti deal, international cement major, Holcim announced that it would invest $800 million for a 67 per cent stake in Ambuja Cements India, which would also give it equity holdings in Gujarat Ambuja and acc. Then came Oracle, which forked out nearly $600 million for a 41 per cent holding in i-flex and Merrill Lynch, which paid $500 million for a 50 per cent stake in DSP Merrill Lynch. These are just a couple of examples of the sustained interest among overseas investors to catch a part of the Indian business potential.

It's the story, silly

Clearly, the reasons for the interest in India are its sound macro-economic fundamentals, high corporate earnings and a future that is looking good. That's exactly what companies like Vodafone and Oracle have subscribed to while making their mega-investments in India. While there is big activity on the outbound front, the inbound story is about these big-ticket deals. As Jerry Rao, Chairman, MphasiS puts it, "There is a seamless interconnection in capital flow." He should certainly know considering that Texas-based technology services major, EDs, earlier this year, acquired a 52 per cent stake in MphasiS-bfl for $380 million (Rs 1,710 crore). The advantage that the deal brought to the Indian company and to the US major was pretty significant. "We were a mid-tier ITEs company and we needed to accelerate into the top-tier. From EDs' perspective, they needed to make a meaningful India presence and the benefit has been that we are today considered for larger contracts which we could not have managed alone," adds Rao.

The benefits of deals such as these can differ. When US' Mylan Laboratories' picked up a 71.5 per cent stake in Hyderabad's Matrix Laboratories for $736 million the latter got access to a large basket of products and technologies besides working with a large us player. "The synergies that this deal will bring are those of backward integration for Mylan's products, widening of the technology base and transforming Mylan/Matrix into a global player," explains Matrix's CEO Rajiv Malik.

Obviously there's something to be learnt by both-the foreign investor and the Indian investee. Says Sunil Mittal, Chairman and Group Managing Director, Bharti Enterprises: "Vodafone gets an opportunity to understand our unique business model and we get to learn from their operations in developed as well as other emerging markets."

Examples like these confirm that India Inc has a vast array of companies which are extremely globally competitive. Besides, the international majors' ability to recognise India as a long-term prospect works very well for India. The determining factor could well be the ability to strike the appropriate synergy. When Telekom Malaysia (tm) decided to invest $179 million (Rs 805.5 crore) for a 49 per cent stake in Spice Communications, the reason for the deal was amply clear to both the partners. According to Spice's Chairman, B.K. Modi, his company is already in the business of manufacturing handsets, providing software for mobile phones apart from being a mobile service provider. "Our relationship gives us a footprint for our products in TM's overseas markets like Malaysia, Indonesia and Singapore," he points out.

Inbound vs. Outbound

The value of an inbound deal is often huge although their numbers are usually small. In 2005, there were 56 inbound deals (valued at $5.2 billion) as compared to 136 outbound ones (valued at $4.3 billion). Telecom had a large share of the inbound deals with Maxis and Apollo Hospitals agreeing to put in over $1 billion in Aircel. With the $1.5 billion Vodafone-Bharti deal, telecom dominated the inbound story for 2005.

But things have changed. Between January and October 2006, there were 62 inbound deals valued at $4.67 billion (Rs 21,482 crore) compared to 147 outbound deals valued at $15.72 billion (Rs 72,312 crore)-including the proposed buyout of Corus by Tata Steel for $8 billion. Like 2005 most of the inbound flows have been to companies in the cement, telecom, pharma and IT/ITEs businesses.

Why aren't there more inbound deals? One reason could be valuations. Says Manisha Girotra, Managing Director and Chairperson (India), UBS Securities: "Valuations are so rich today that overseas companies will find it difficult to justify an Indian acquisition." That perhaps explains why overseas majors take their time before investing in India. Both Holcim and Vodafone are said to have taken over two years to decide before signing on the dotted line.

Yet, the opportunities that India offers are too tempting to pass up. With robust growth of the Indian economy and good performance by companies across several sectors, the India story could only get more followers. And that could mean bigger flow of inbound investments and, therefore, more big-ticket deals.