Tech deals still hot despite credit crunch

NEW YORK (Reuters) - The technology sector, strongly targeted in the recent leveraged buyout boom, could see some healthy deal flow, even as private equity firms pull back amid turmoil in the credit markets.

With debt markets effectively shut off for large leveraged buyout deals, investment bankers aren't expecting anything like the $17.6 billion buyout of chipmaker Freescale Semiconductor Inc or the $11.4 billion take-private of Sunguard Data Systems Inc.

But strategic buyers -- companies in the same industry rather than buyout firms -- now have some breathing room to strike deals without so much competition from private equity.

"Interestingly and importantly, new deal idea formation continues," said Jon Woodruff, head of technology M&A at Goldman Sachs Group Inc. (GS.N), "In addition to things that we were working on two or three or four months ago, new ideas continue to bubble up on a strategic-to-strategic basis."

M&A practitioners and business development executives in tech companies are "just about as busy as they were six months ago," said Woodruff, who also said current market conditions hadn't translated into a pause on strategic deals.

Corporates -- companies rather than buyout firms -- which had been distracted by take-private conversations with sponsors, or private equity firms, are now able to focus again on strategic growth and deals. Deals from several million dollars to the billions are in the pipeline, according to technology investment bankers who declined to be named.

The agendas of large-cap technology companies looking to do strategic transactions are completely unchanged by the credit markets, said a tech banker who declined to be named. That banker, along with two others who also declined to be named, said deal flow was still busy on the strategic front.

"Our pipeline of M&A activity has shifted, not just because the sponsors have dramatically pulled back, but because the corporates are much more active," said David Popowitz, a managing director of Credit Suisse (CSGN.VX) and global co-head of its technology group.

While the amount of tech deals in total dollar terms is expected to drop over the coming year, the overall number may increase as companies get back to doing tuck-in deals, filling in holes in their business.

"Those (deals) are what technology M&A is about ... people filling in product gaps and doing industry consolidation moves," Popowitz said.

Private equity buyouts made up more than 50 percent of all technology deals so far this year in terms of dollar value, driven up by a small number of large buyouts.

But strategic deals far outweighed buyouts in terms of the number of deals, with 90 percent of the 1,335 technology deals this year made up of corporations buying rivals, according to data from Thomson Financial. Thomson is owned by Thomson Corp TOC.TO, which agreed to buy Reuters Group Plc RTR.L.

The pause in buyout deals will likely give corporate buyers a window of about six-to-nine months to strike deals without competition from buyout firms, said Paul Bowen, president of Boston-based tech M&A adviser Bowen Advisors.

"The big implication is a number of legitimate corporate buyers have been sitting on the sidelines because they flat-out didn't want to compete, or didn't think they could pay the premiums needed to get these deals done," said Bowen. "So now, the corporate buyers will step up more aggressively."

HOT SECTOR

Software and the Internet are two M&A arenas particularly active over the past few years, and bankers expect more deals as larger players become more dominant and buy smaller firms.

Areas with a high level of buyout activity, like semiconductors, could also see more deals, according to bankers, while the services sector is ripe for consolidation.

"The sectors where there are still way too many companies are in software and in communications equipment," said Cowen & Co. analyst Arnie Berman.

The technology sector is especially active because many new companies are regularly being created that attract venture capital as well as attention from larger firms looking to fill gaps.

Private equity firms like technology companies because they are less exposed to a drop in consumer spending and manage to avoid the turmoil of unstable cash flows and slumping business volumes.

Tech companies are also unique because they have a high level of cash on their balance sheets relative to other sectors, typically because they are less mature businesses than companies in other sectors that have built up debt over the years.

The tendency to pay for deals in cash will likely continue, said Goldman's Woodruff, since much of the activity involves large companies buying smaller ones.