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Barbarians at the tech gate
Private equity firms should start scooping up more tech companies. Who's on their shopping list?
April 21, 2005: 5:30 PM EDT
By Paul R. La Monica, CNN/Money senior writer

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LB-Whoa! Shares of SunGard and Insight Communications have surged this year thanks to buyout offers.
LB-Whoa! Shares of SunGard and Insight Communications have surged this year thanks to buyout offers.
Next to go LBO?
Analysts say these six companies could be attractive to private equity firms due to sagging stock prices and solid growth rates.
Company 5 Yr. Price change* LT Est. EPS Gr. Market value 
Siebel Systems -85% 12% $4.6 billion 
BEA Systems -85% 10% $2.9 billion 
BMC Software -68% 10% $3.3 billion 
Cablevision -54% 12% $7.8 billion 
Compuware -50% 12% $2.4 billion 
Computer Sciences -47% 11% $8.2 billion 
 * through 4/20/05
 Source:  Thomson/Baseline

NEW YORK (CNN/Money) – Parachute pants. Pac-Man. Madonna...before she went cuckoo for Kaballah.

No, I haven't been watching too many reruns of VH1's "I Love the 80s." All those vestiges of the "Me Decade" are on my mind because it's starting to look like another hallmark of my formative years is making a comeback: the leveraged buyout. And it could be a particularly big trend in technology.

First, a quick refresher. A leveraged buyout or LBO happens when a company, usually an investment firm, takes over another company and uses debt as the main source of financing -- hence the leveraged part. Often, a public company is acquired and taken private.

LBOs were big in the 1980s. The most famous was the purchase of RJR Nabisco by Kohlberg Kravis Roberts in 1988, chronicled in the best-selling book "Barbarians at the Gate."

But there have been a couple of notable LBOs in tech in recent months and that's raised the possibility that the barbarians may be ready to storm the gates again.

Last August, cable company Cox Communications was taken private by the company's largest shareholder, Cox Enterprises. This March, the co-founders of a smaller cable firm, Insight Communications (Research), teamed up with the Carlyle Group and offered to take Insight private through an LBO.

And most recently, one of the biggest LBOs in history was announced, with a consortium of seven buyout firms (including KKR) agreeing to pay $11 billion to take over financial services software firm SunGard Data Services (Research) late last month.

Back to the future

According to Dealogic, a research firm that tracks mergers and acquisitions, nearly half of the $37.5 billion in leveraged buyouts during the first quarter took place in the tech and telecom sectors.

And this could be just the beginning of a wave of tech LBOs. It may be sobering for some tech fans to hear this, but tech companies will probably continue to become more intriguing to private equity firms because the industry is maturing.

With that in mind, Jesse Reyes, head of private equity research and consulting firm Reyes Analytics, said that a flurry of tech LBO deals is probably long overdue.

"Tech is a great place for opportunity, much in the same way that private equity firms looked at manufacturing in the 80s," Reyes said.

Many tech stocks have slowly recovered from their post-bubble-bursting lows but still remain well off their highs. And the pressure to continually meet and beat what can be fickle Wall Street expectations could lead more techs to find solace in being taken private...especially if it's at a premium price.

SunGard, for example, sold out for $36 a share, 44 percent higher than the stock's price before rumors of the deal began to circulate on Wall Street.

"Tech companies are frustrated with equity analysts and their inability to get beyond the quarterly cycles," said Deborah Williams, an analyst with Financial Insights, a research firm focusing on financial technology. "Many companies feel their growth strategies are not being actively rewarded."

Williams adds that now is a good time for buyout shops like Carlyle Group, KKR and others to be looking at public tech companies since the prices are reasonable and there aren't many alternatives, given the lack of excitement in the IPO market.

"I think we will see more of these types of deals happening. There's a lot of private equity money and not a lot of great startups to invest in," she said.

Cable and software targets

So which tech companies could be next to go private?

Arnie Berman, senior technology strategist for research firm CreditSights, wrote in a recent report that several other cable companies, including industry leader Comcast (Research) and Cablevision (Research) could make sense as LBO targets.

"LBO candidates have several characteristics in common: healthy businesses, stock prices that reflect little respect, stable cash flows, and potential catalysts to still higher cash flows (cost cutting, asset sales, etc.)," wrote Berman.

That is an apt description of the cable industry. Berman added that another tech services firm, Computer Sciences (Research), fits many of the above criteria.

In addition, Berman wrote that several software companies are ripe to be taken private because even though they may be slow-growth firms, they do have stable maintenance streams and strong balance sheets and that makes them attractive to private equity buyers.

Some of the software companies he cited as possible LBO candidates are BMC Software (Research), Sybase (Research), Compuware (Research), Novell (Research) and BEA Systems (Research).

And in another recent report, Fulcrum Global Partners software analyst Jamie Friedman wrote that Siebel Systems (Research) could make sense.

Siebel has struggled to compete against larger rivals like Oracle (Research), SAP (Research) and Microsoft (Research), but the company has $2.25 billion in cash on its balance sheet. Plus, Siebel's CEO Michael Lawrie stepped down last week, leading to speculation that the company could be sold.

Reyes thinks there haven't been more tech LBOs already because there are concerns about prices getting out of hand as more strategic buyers, public companies like Oracle, for example, scour the landscape for acquisitions. But he thinks there will be many more deals in the months ahead.

"Everyone is testing the waters," Reyes said.

So get ready for another 80s revival. Now excuse me while I go watch "The Breakfast Club."

For a list of the year's biggest deals, click here.

For a look at all recent mergers, click here.

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Tech Biz
Leveraged Buyouts
Mergers - Acquisitions - Takeovers
Written by: Paul R. La Monica
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