Private equity firms have shown more than a fleeting interest in acquiring high tech companies these days. Just take a look at this year’s purchase list:
· Avaya by TPG Capital and Silver Lake Partners for $8.2 billion
· CDW by Madison Dearborn Partners for $7.3 billion
· Alltel by Goldman Sachs and TPG Capital for $27.5 billion
· Acxiom by Silver Lake Partners and ValueAct Capital for $3 billion
· Primax Electronics by Hong Chuan Investment for $250 million
· First Data Corp. by Kohlberg, Kravis, Roberts & Co. for $29 billion
With that in mind, a New York Times article today says that investors at UBS have built a model for looking at hypothetical leveraged buyouts of technology companies and ranks potential targets by how profitable they might be. The model says that any company that would bring a return of 20% or more to a private equity buyer could be a buyout candidate. UBS says 57 technology companies would currently fit its bill. The top 10 companies on UBS’s list include: Unisys, Bearingpoint, Tibco McAfee, Symantec, and BEA Systems. The story notes that Microsoft and Oracle and other large companies fit the bill but are likely way too large for a buyout. At the other end of the scale with estimated returns less than 10% are Apple, Dell Computer, Netgear, Cypress Semiconductor, and Red Hat Software. In a recent Network World article experts said such deals may make investors happy but leave much to be desired for workers and customers. “When private equity shows up it’s more about financial engineering, than it is about sort of products and synergies and those sorts of things,” says Samuel Wilson, an analyst with JMP Securities. “Typically these deals load the company up with debt with significant restraints on operations and cash flow and demands for a better output,” says Francis McInerney, managing director of North River Ventures. “Technology development falls off because cash flow goes somewhere else.”
