Cash-rich private-equity firms continue to search for technology-sector acquisitions. I believe McAfee is a candidate for a private buyout, but Fitch Ratings has other candidates in mind.
In the Wall Street Journal today, journalist Serena Ng reports that the ratings company analyzed 21 companies in the technology sector to determine which firms could be buyout targets. Fitch concluded that many tech companies might be too large and expensive to be acquired by private-equity firms, but it found many factors that are making the sector more appealing to buyout firms than in years past.
Several years ago, the technology sector was characterized by many small companies with erratic earnings and outrageous stock valuations. It has since matured into one whose companies have more stable profits and cash flows — characteristics that appeal to private-equity investors. Since many tech companies traditionally relied on selling stock to raise cash, they don’t have a lot of debt on their balance sheets — meaning that they have the capacity to take on more debt in a buyout.
Fitch says possible buyout candidates include software company CA Inc., formerly known as Computer Associates, and Convergys Corp., a provider of information-technology services.
Among computer vendors, Fitch noted that Dell Inc. sports characteristics that might make it attractive to private-equity investors — very little debt, strong and steady cash flows and good market share, while its share price has tumbled 18% so far this year. Dell, though, has a market capitalization of approximately $56 billion, making a leveraged buyout risky and perhaps prohibitively expensive.