IBM: Advantage India
When International Business Machines Corp., the world's largest computer-services provider, holds its annual analysts’ meeting in Bangalore in June - for the first time instead of its homestead of New York, it will send a clear message to its shareholders. IBM has the “India Advantage” - cost-effective resources and a booming market.

IBM is holding the meeting in style. It has rented the Bangalore Palace, a sprawling Colonial-era edifice modeled on Britain's Windsor Castle, in the heart of India's Silicon Valley. The high profile event, from June 6 to 7, will be attended by 10,000 IBMers. India ‘s President A.P.J. Abdul Kalam will be the keynote speaker at a ceremony compered by Indian actress Diya Mirza.

India is the fastest growing market for IBM. It grew 61% in the first quarter ending March 2006. In 2005, it averaged 55% growth – again IBM’s fastest growing geography. Not surprisingly, IBM added 16,500 staff in India last year even as it culled its workforce by 14,500 people worldwide. Its staff totals more than 40,000 in India – second only to the U.S.

IBM’s net income increased to $1.71 billion for the quarter ending March 2006, compared to $1.4 billion during the same quarter last year. Analysts attributed two factors behind the better-than-expected earnings: job-cuts and higher sales in emerging markets. India helped on both fronts.

India has helped Sam Palmisano reverse the earlier trend of declining profits to the benefit of its shareholders. India is “the jewel in the crown” of IBM, the technology industry’s bellwether stock. If others in the industry hadn’t noticed that and learnt the “India Advantage” lesson, IBM’s analysts’ meeting this month will ensure they do.

Venture Capital: Destination India
In what industry analysts view to be a “watershed event,” Silicon Valley-based Venture Capital fund Sequoia Capital has merged its India operations with Bangalore-based VC Fund WestBridge Capital Partners. It was notable on two accounts: VC funds rarely acquire or merge with other funds given the importance of team chemistry, shared investment vision and ‘baggage’ associated with a Fund’s legacy portfolio. Second, despite discussions over the past five years, no blue-chip Silicon Valley fund had actually merged with an India Fund – until now, that is.

The reason for doing so is simple: a scarcity of fund managers. While India is one of the most attractive private equity markets in the world - $1.5 billion worth of investments were made in the first quarter of 2006 compared with $2 billion for the entire year in 2005 - there exists a dearth of investment managers in India. Given the embryonic stage of the private equity industry, there are no more than 40 private equity fund managers in the country – and only half of them can point to a successful track record.

WestBridge has been one of the most active VC funds in India. Although the new entity would be called Sequoia Capital India, the four Managing Directors of WestBridge Capital Partners—Sumir Chadha, KP Balaraj, Sandeep Singhal and SK Jain — will be in the leading roles responsible for managing investments.

Sequoia joins other Silicon Valley funds such as Kleiner Perkins, Norwest Venture Partners, Matrix Partners, Benchmark Capital, Draper Fisher Jurvetson, and Greylock Partners that have expanded their presence in India recently.

KKR Completes Largest Leveraged Buyout Deal in India
Flextronics Software Services (FSS), a software services company, offering voice over packet and broadband solutions was acquired by New York-based private equity firm Kohlberg Kravis Roberts & Co. (KKR). KKR paid $900 million in the largest leveraged buyout in India, outbidding at least nine other interested parties. While the Indian vendor of communications solutions hopes to get more introductions from KKR to help accelerate its business, FSS will provide the deep bench of talent required to provide cost effective solutions from an India base.

The preeminence of India as the center for cost-optimized software and services was furthered as Electronic Data Systems Corp., the world's No. 2 seller of computer services, made an open offer of $380 million for 52% of IT and BPO services company MphasiS BFL Ltd. It also bought a 1% stake by purchasing shares owned by its MphasiS Chairman Jerry Rao. EDS’s purchase is similar to one by IBM, which purchased India’s third largest (at the time) BPO company Daksh eServices in April 2004, in an effort to increase their “India capability.”

Sensex Falls: Smart Investor’s Opportunity
May 18 saw the biggest fall in absolute terms for the Sensex, India’s benchmark stock index, which dipped 826 points or 6.8% in a day. India’s finance minister Mr. P. Chidambaram termed it a ‘manufactured crisis,’ as it originated due to a tax related confusion regarding the foreign institutional investors (FIIs). The confusion coincided with a drop in stock market prices worldwide. The FIIs and domestic fund data that came later, however, suggested that FIIs were not bothered about the domestic issues, as their net selling was only $180 million on May 18, which was very much in line with their selling that started since May 12 under global pressures.

The domestic funds, on the other hand, used the opportunity to consolidate their holdings with a net purchase of $171 million (Rs. 763 crore) on May 18. In fact, the domestic funds have remained net buyers continuously since May 12. The FIIs remained net sellers almost every day during the same period, of course in line with their ‘global selling’ for the reasons rooted in the US economy—the interest rate outlook and fluctuations in the dollar price vis-à-vis other currencies.

The domestic fund buying showcases the inherent strength of the Indian stock market, which differentiates it with most of the emerging markets. Their faith in the Indian growth story prompted them to take advantage of the market slide to buy more Indian equities.

The market should soon rebound from the tax confusion and worldwide drop in equities. Investors might find this to be a good opportunity to purchase shares in India’s high growth companies at a 20% discount to what they were a few weeks ago.