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May 16, 2005
Tech Buyout Shopping List
In last week's issue of BusinessWeek, we ran a story by yours truly and Emily Thornton about the rise of buyouts in the tech industry. Recently, the Mercury News and Red Herring have also weighed in on the subject. Most tech buyouts these days are of the mid-size variety (under $1 billion). There are scores of mid-size companies--or mid-size divisions inside large companies--that are prime buyout material, thanks largely to the VC-fueled tsunami of tech company creation in the '90s. Mega-buyouts ($1 billion and up) are a rarer phenomenon in tech, but recent deals like Sungard and Doubleclick suggest they may become more common. To get ideas about which big tech companies may be ripe for the picking, I've been playing around with various screens. You may be surprised by some of the names that have made the cut.
We'll use my latest screen. Here are the admittedly arbitrary criteria.
1) Industry Classification: software and services OR technology hardware and equipment OR semiconductors and semiconductor equipment
2) Market Capitalization: between $1 billion and $20 billion. (A valuation metric.)
3) Enterprise Value/EBITDA: less than 20.1. (A valuation metric.)
4) Price/Tangible Book Value: less than 20.1 (A valuation metric.)
5) 2004 Revenue Growth: between 0 and 10% (Indicates maturity and performance.)
6) Debt/Capital: less than 20% (Indicates ability to service debt.)
7) Change in 2004 Working Capital: less than $100 million (Indicates ability to service debt.)
We run the screen, and presto! Of the 17 companies that qualified, here are my 10 favorites:
Cadence Design Systems Inc.
Affiliated Computer Services Inc.
Storage Technology Corp.
Benchmark Electronics Inc.
Foundry Networks, Inc.
Parametric Technology Corp.
Let me know what you think of the results and how I could improve the screen.
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The most important thing missing from tech buy-outs is strategic re-engineering.
Traditionally, LBO investors have mastered the financial and operational leverage aspect, but Tech, by its very nature, is not a simple beast. Too many things change in a market over a reasonably short period of time, including what technology enables.
Your list uses a relatively simple / simplistic algorithm for financial leverage. If you do some strategic re-engineering, many other companies would come up on the list: Netflix, LSI Logic, E.piphany, Saba Software, ...
Here is some analysis on each of them:
LSI Logic: http://sramanamitra.com/blog/24
Mentor Graphics: http://sramanamitra.com/blog/35
Posted by: Sramana Mitra at June 9, 2005 12:42 PM