Making a Redifference

The next dot-com buyout may have a little international appeal. New Delhi's Hindustan Times is reporting that India's Rediff.com (Nasdaq: REDF) is receiving buyout interest from companies such as Yahoo! (Nasdaq: YHOO) and Google (Nasdaq: GOOG).

Relying on unnamed investment banker sources, the timing of the story is suspect. It's awfully convenient to find investment bankers getting chatty just as Barron's runs a story on how overpriced Indian shares of Rediff and broadband access provider Sify (Nasdaq: SIFY) have become.

That's the real challenge for Rediff, after all. Running the third most popular portal in the world's second most popular nation is valuable, but are Rediff investors paying far more for the stock today than potential suitors may be willing to pay tomorrow?

Rediff isn't cheap. It is now trading at 85 times this fiscal year's profit target of $0.30 per share. That would be a reasonable price if Rediff was gaining market share at the expense of dot-com juggernauts from the West. Chinese search engine giant Baidu.com (Nasdaq: BIDU) commands a lofty price tag because it has been able to keep Google and Yahoo! at bay in China. However, Web traffic watcher comScore finds that Yahoo! and Google have already lapped Rediff in several areas. Yes, Rediff trades at a more attractive earnings multiple of 56 if we look ahead to next year -- so it's clearly expected to grow nicely -- but there isn't much of an incentive for Google or Yahoo! to snap up a smaller player in a deal that won't be accretive. If anything, it would make more sense for an MSN.com or an IAC (Nasdaq: IACI) to step in as a way to gain a stronger foothold in the country.

Unfortunately, they too will balk at paying too dear a price. India is certainly a compelling growth market. Less than 2% of the country's 1.2 billion residents have computer access to go online. India's GDP per capita is also less than half of what you find in China. The economy isn't growing as quickly as the boom in China, but the upside potential for patient investors is huge.

These are the reasons why Web-centric stocks like Rediff and Sify are compelling. It's about trying to land the double whammy of buying a hot stock in a hot market. Cashing in on promising international markets is at the heart of the Global Gains newsletter service. The key with the stock research service -- as it should be with you as an investor -- is to make sure that you don't overpay for that passport stamp.

Keep an eye on Rediff. Wait for the enthusiasm to die down or the first sign that the company is regaining market share. Until then, there's no point in overpaying for the sake of chasing the tailwind of questionable buyout chatter.

For related Foolish content:

• Rediff Is in the Black
• Emerging Opportunities in Emerging Markets
• This Is Why You Don't Stand on the Sidelines

Yahoo! is a Stock Advisor recommendation. Baidu has more than doubled since being singled out last year to Rule Breakers subscribers. Find out why with free a 30-day trial subscription to both stock research services.

Longtime Fool contributor Rick Munarriz is fond of India's growth potential and is keeping a close eye on Rediff these days. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.