Hardware and telcoms tipped for buyouts

By Megan Davies

BOSTON (Reuters) - The next wave of leveraged buyouts in the technology industry is likely to extend to computer hardware and telecom equipment sectors, a managing director of JP Morgan (JPM.N) predicted on Tuesday.

Raj Kapadia, who specializes in technology leveraged finance, sees buyouts continuing in software, services and semiconductor sectors, but also taking in industries that typically have not seen so many deals.

"I think hardware is the next wave," he told Reuters in an interview at JP Morgan's annual technology conference.

Although there was a risk with such firms if they missed a product cycle, he said hardware companies not geared to the consumer market are more likely to be attractive to private equity.

The telecoms equipment sector he sees as tougher to take private due to over capacity in the industry -- meaning there probably needs to be consolidation between firms before real LBO activity picks up.

Historically, Kapadia says the first wave of technology buyouts were in the software world, such as industrial design software maker UGS Corp -- bought by private equity in 2004. That business was re-sold to German conglomerate Siemens AG (SIEGn.DE) earlier this year.

The second wave was made up of services firms, he says, such as the $11.4 billion buyout of SunGard Data Systems in March 2005.

Semiconductor buyouts such as Freescale Semiconductor Inc., taken private for $17.6 billion in 2006, followed in the third wave, he said.

The fourth wave has come in the past few weeks, he says, with financial services-related companies such as The Blackstone Group's BG.UL announcement last week that it would purchase business services company Alliance Data Systems Corp. (ADS.N) for $6.76 billion and payment processor First Data Corp. FDC.N agreeing to be bought by Kohlberg Kravis Roberts & Co. in April for $26 billion.

PRIVATE EQUITY TARGETS TECH

Technology has been increasingly targeted by private equity firms as the industry matures from the bubble period of the late 1990s and year 2000.

"As relates to technology there are a combination of things that have happened that makes them ready for folks like us to buy," Andrew Balson, managing director at private equity firm Bain Capital, said at the conference.

He cited slowing rates of growth across technology that has brought some valuations down and some technology companies in reach of private equity.

Private equity firms are in general cash rich and hunting for targets across the sectors.

Jim Casey, the head of JP Morgan's high yield debt capital market, says private equity firms overall have about $200 billion of unspent capital that could theoretically be deployed into $1 trillion of leveraged buyouts (LBOs) over the next five years. That could work out to about 60-70 LBOs of around $15 billion each, he said.

Casey, speaking at the conference, estimated that the biggest LBO could reach $80 billion, based on expectations of what the equity and debt markets would support.

Adding in a stub equity portion of $5 billion to $10 billion could bring that LBO size to $90 billion, he said. Private equity players are increasingly offering shareholders an opportunity to take a stake, known as "stub equity" in restructured companies. Such a structure will be offered to shareholders in radio operator Clear Channel Communications (CCU.N) if a buyout deal proposed goes through.

"It's just very bright, aggressive moves by the LBO sponsors to take advantage of the debt capital," Casey said during the conference.