DealTalk: Private equity firms on prowl for tech targets

NEW YORK (Reuters) - Private equity firms are on the prowl for more technology targets, but investors should not expect a mad rush of deals before the end of the year, said several senior sector bankers.

Just last week, Carlyle Group CYC.UL announced two deals: a $2.9 billion acquisition of communications cable maker CommScope Inc CTV.N and a $2 billion acquisition of telecoms company Syniverse Technologies SVRTE.UL.

Technology is a strong area of focus for private equity, said Chris Turner, a managing director with Barclays Capital's financial sponsors group. Particularly with the stable cash flows, these deals offer good risk-adjusted returns, Turner said.

All private equity firms are looking at the sector opportunistically, including Blackstone Group (BX.N), TPG TPG.UL, Bain Capital, Providence Equity Partners, THL Partners and Kohlberg Kravis & Roberts (KKR.N), the bankers said.

The big sponsors are very comfortable putting $500 million to $1 billion to work, said Turner. Coupled with their limited Partners that invest in the firms, and potentially other private equity or sources of private capital, they can write equity checks well in excess of $1 billion to $2 billion, he said.

Co-investors for private equity could include pension funds and sovereign wealth funds.

Publicly traded technology companies with a market capitalization between $1 billion and $5 billion which are relatively mature and cash flow-positive are attractive to mid-sized and big private equity firms, said a banker who spoke on condition of anonymity.

"A number of these companies are really great cash cows, but they are just not growing," the banker said. "So private equity are just flocking to them because they think there are ways to extract value."

Companies in the sector that remain at the center of perennial private equity takeover speculation include Tibco Software (TIBX.O), BMC Software (BMC.O), Acxiom Corp (ACXM.O) and storage providers CA Inc (CA.O) and Symantec (SYMC.O), bankers said.

"But you need to be able to prove that a company can be much better run private then being public," said Eric Mandl, global head of software banking at UBS (UBS.N) (UBSN.VX).

SEAGATE SWEEPSTAKES

A number of private equity firms have spent recent weeks eyeing disk drive manufacturer Seagate Technology (STX.O), a deal that could be valued at $10 billion, sources familiar with the situation said. In October, the company announced it had retained Morgan Stanley and Perella Weinberg after receiving preliminary indications of interest about taking the company private.

At least four private equity firms, including TPG, Bain and KKR, have been interested in Seagate, these sources said. However, based on high price expectations, KKR's interest is said to have waned while TPG remains keen.

Some sources have suggested two different consortiums have been reviewing the company, but did not elaborate.

Price expectations by the seller ranging from $16-19 per share are becoming a deterrent to a deal, said the sources.

Bankers warned not to expect a mad rush of private equity deals in technology in the fourth quarter.

There might be pressure to trade assets that are private equity-owned due to potential changes in taxes by the end of the year, but from the perspective of deploying capital, the private equity buyers remain opportunistic, said Mandl.

In addition, because there is a fair amount of money chasing a finite amount of assets, buyers are trying to put money to work "where they think they have an angle other than just adding leverage," said Turner. The angle could be a management team, prior experience with a portfolio company or operating expertise such as adding distribution and cutting costs, Turner said.

There are three main ingredients for tech-sector private equity deals, said Mandl: the target company must have a high recurring revenue stream, proven growth record, and products that are "sticky."

Stickiness refers to a product or software that has been installed and is very difficult or costly to switch, said Mandl.

(Reporting by Nadia Damouni in New York, editing by Matthew Lewis)