Private equity hungry for tech

By Megan Davies and Joseph A. Giannone

SAN FRANCISCO (Reuters) - Private-equity investors are hungry for technology takeovers because of the industry's more predictable growth, rising piles of cash and cheap stock prices.

Investors also see deal opportunities ahead as technology conglomerates shed business units to chase higher returns.

"I think there is still so much opportunity in the technology world that there's going to be years and years of good deals available," Jim Davidson, a founding member of Silver Lake Partners, told the Reuters Venture Capital Summit in San Francisco.

Slowing rates of profit growth and increased global competition has fueled consolidation among technology companies over the past year.

"Private equity people look at technology and see a pretty significant ability to be an agent to change, and to make companies more efficient or more aggressive with their capital structure," said Colin Stewart, vice chairman of global capital markets at Morgan Stanley (MS.N: Quote, Profile, Research, Stock Buzz).

That's driving a spate of leveraged buyouts (LBOs) in the technology industry. Leveraged buyouts firms borrow funds to take public companies -- or parts of companies -- private, aiming to improve performance and resell them.

Earlier in September, chip maker Freescale Semiconductor Inc. FSL.N agreed to be bought for $17.6 billion by a private equity consortium in what could be the biggest leveraged buyout of a technology company. That followed an $11.4 billion buyout of SunGard Data Systems in March 2005.

But increased buyout interest has raised fears that investor returns could be hurt by firms taking on too much debt.

Investment returns cannot match recent years' extraordinary performance for long, private equity and venture capital executives said at the Reuters Venture Capital Summit in San Francisco.

"At some point, if you have high levels of leverage on companies and growth slows, you'll have people not being able to meet their debt obligations and you'll see higher default rates," said Bob Grady, a managing director of Carlyle Group, one of the world's largest private-equity firms.

Carlyle and other firms are raising distressed debt funds to take advantage of what they expect to be a growing supply of securities from deals gone bad.

The recent rise in the number and size of LBOs has also caused concern that there may be a bubble, with too much cash chasing too few deals.

Alan Salzman, managing partner at VantagePoint Venture Partners, said that leveraged buyout returns could not be sustained any more than venture capitalists should have expected their heady profits of the late 1990s to continue following the burst of the technology bubble.

"The LBO folks obviously have had a lovely run the last few years. It's just not sustainable," he said.

Buyout returns in the year ending March were 28.5 percent, nearly three times the performance of the benchmark Standard and Poor's 500 Index .SPX. Over the last 20 years the buyout industry's average return was 13.3 percent, data provided by Carlyle at the summit showed.  Continued...