After a string of eye-popping deals in 2007, India established itself as the newest bulked-up player in global cross-border M&A. That reputation is taking a drubbing. Like their counterparts in the West, Indian companies that spent big now face oversized debt and sharply falling demand.

"Two years ago, Indian companies, before reticent to do acquisitions abroad, changed their attitude into 'we can conquer the world and we don't want to be left behind.'" says Satish Shenoy, principal of Mumbai-based investment bank Meghraj SP Corporate Finance (Pvt.) Ltd. "The problem with this kind of approach to M&A is that it was very easy to acquire, but it's been very difficult to digest."

Those Indian corporations are scampering to stabilize their offshore empires while facing tough times at home. Indian banks haven't suffered from bad lending the way U.S. and European banks have. However, a steep decline in India's stock market has not only choked off funding based on shares as collateral but has triggered margin calls. Offshore funding for Indian companies, as for everyone else, has disappeared as well. "It's a double whammy," says Shenoy.

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Indian corporations seemed to come out of nowhere to pull off some of the biggest global acquisitions of 2007. They included the $6.4 billion acquisition of Atlanta aluminum manufacturer Novelis Inc. by Hindalco Industries Ltd., the purchase of Canadian steel company Algoma Steel Inc. for C$1.85 billion ($1.47 billion) by Essar Global Ltd., and, most spectacularly, the £6.2 billion ($8.6 billion) acquisition of the Anglo-Dutch steel company Corus Group plc by Tata Steel Ltd.

Tata Group, India's largest business conglomerate, followed this up last March with the $2.3 billion acquisition of the Jaguar and Land Rover Group from Ford Motor Co.

Commodity prices have fallen, demand for raw materials is way down and, in terms of the global car market, it has been a disaster. "They're dealing with the ramifications of all that," says Yash Rana, Hong Kong-based partner at Goodwin Procter LLP. He adds, "It didn't help that they paid top dollar at the top of the market."

"There's a heavy dose of reality this time round" regarding outbound M&A, says James Winterbotham, the London-based partner of investment bank India Advisory Partners Ltd.

While he believes the Tata family, with its "deep pockets," can weather the storm, others may not be so fortunate. "You will see distressed deals feature this year."

Indian cross-border M&A remains a two-way street, however. While outbound deals attracted the biggest press, inbound acquisitions rose dramatically as well in numbers and in value in 2006 and 2007, according to data compiled by India Advisory Partners. Not surprisingly, that activity fell off during the second half of last year, although two megadeals transpired. Tata Group in November sold a 26% stake in its wireless and mobile telephone provider, Tata Teleservices Ltd., to Japan's NTT DoCoMo Inc. for $2.7 billion.

An even bigger bet was the roughly $5 billion sale of 66% of India's largest pharmaceutical company, Ranbaxy Laboratories Ltd., to Japan's Daiichi Sankyo Co. Ltd. The deal, completed in November, signaled the willingness of Indian owners to completely divest their holdings. It also proved a huge financial drag on its new Japanese owners. Earlier this month, Daiichi Sankyo announced it would take an almost $4 billion write-down reflecting the more than 50% decline in the share price since the deal was announced. The volatility of India's stock market underscores another problem. "It's difficult to price deals," Rana says. "In a week or 10 days, it's suddenly 30% less than the price you set. You go back to the company and renegotiate, but from the company's side, it's difficult to justify selling at the lower price."

On top of everything else, the revelation in January that Satyam Computer Services Ltd.'s founders misappropriated $1 billion brought into question India's corporate governance.

At least temporarily, it has sapped confidence in the country's public companies and will make passive stock market investment that much more difficult (see story, page 19).

For all of that, those involved in Indian M&A continue to maintain some transactions will get done; they just may take longer and not be so big. The Bombay Stock Exchange's Sensex index has fallen 57% since the end of 2007. Result: Indian companies are more attractively priced. Telecommunications, pharmaceuticals, financial services, retail and infrastructure are all sectors expected to attract the attention of strategic buyers, especially from Asia. Indian banks have tightened credit markets but not gone into total hibernation like their Western counterparts. "The systemic problems in the West that banks have to work through are nonexistent in India," says Rana.

He and others also report continued interest among private equity players in India. Middle-market shops "are actively looking," Rana says -- and in a wide range of sectors.

Even some Indian companies may take advantage of the depressed business environment elsewhere in the world to make some strategic acquisitions. "Indian outbound deals are still going to happen, but they'll be much smaller," Winterbotham says.