Telecom-equipment on buyout radar with Avaya deal

NEW YORK (Reuters) - Technology sectors typically not targeted by private equity investors are now on the radar screen as cash-rich buyout firms widen their search for places to invest -- evidenced by the $8.2 billion buyout of Avaya Inc. (AV.N)

Following the bubble and burst of the late 1990s and 2000, technology companies have been increasingly targeted by private equity as the sector matures.

The early trends were to take software, services and semiconductor companies private, but buyout firms are widening their searches for new opportunities.

Raj Kapadia, managing director of leveraged finance at JP Morgan (JPM.N), told Reuters earlier this month that the next wave of leveraged buyouts in the technology industry would likely extend to the computer hardware and telecom equipment sectors, while continuing in the original industries targeted.

That was evidenced with the announcement late Tuesday by Avaya, a telecommunications-equipment company, that it agreed to be acquired by private equity firms TPG Capital and Silver Lake. It follows service provider Alltel Corp's (AT.N) acceptance of a $25 billion buyout offer from TPG and a Goldman Sachs unit.

Private equity is also delving into the telecom device market. Treo smartphone maker Palm Inc. PALM.O announced Monday it will sell a 25 percent stake to Elevation Partners.

"I wouldn't say (telecoms equipment) is an area where private equity has been really focused on," said Kaufman Brothers analyst Manuel Recarey, speaking before the Avaya announcement. "That could change because a number of the companies in the sector do have strong balance sheets and a lot of cash and so forth -- so they do have some characteristics that the private equity investors typically look for."

Paul Bowen, president of M&A advisory firm Bowen Advisors, said private equity firms are keen on firms like Avaya and Palm as they are hunting brand names with a large installed customer base. These types of deals are for the long term, he said in an email to Reuters, as private equity capital needs to be given time to execute.

Telecom equipment firms weren't originally targeted by private equity because they were among the hardest hit by the bubble burst, analysts and bankers say.

"Telecom equipment players went through a deep downturn after the telecom bubble," Kapadia told Reuters late on Monday. "Performance fell off a cliff, so it wasn't easy for people to buy those companies as they didn't have much cash flow. Since then, the market and the telecom equipment space has come back to life. But there are still a lot of players and there is a lot of overcapacity in the industry."

The telecoms equipment sector includes giants such as Cisco Systems Inc. (CSCO.O) as well as smaller firms such as Andrew Corp. ANDW.O, ADC Telecommunications Inc. ADCT.O and CommScope Inc. CTV.N The sector has already seen a share of consolidation with deals including the 2006 takeover of Lucent Technologies Inc. by France's Alcatel, which created Alcatel-Lucent ALU.PA, and a venture between the network units of Nokia (NOK1V.HE) and Siemens AG (SIEGn.DE).

"The broader picture in this space is consolidation activity, as well as buyout activity," Kapadia said.

TOUGH TARGETS

While more deals may be on the horizon in the telecom equipment sector, other technology sectors remain easier to take private, say analysts.

Brenon Daly, analyst at technology research company The 451 Group, says software companies are easier candidates to take private as they tend to have fatter margins than more commoditized hardware businesses.

"We would see far more activity in services and software than in hardware, simply because the balance sheets and business models lend themselves to leverage," he said.

"But because there is so much competition among private equity for deals, that may be pushing them to look into areas where typically they wouldn't necessarily travel," Daly said.

Peter Falvey, co-founder of investment bank Revolution Partners sees increasing interest in the telecom infrastructure sector, but said these types of businesses are pretty volatile and depend on healthy overall markets.

Private equity interest is "a bit of a bet on the sector overall," Falvey said.