Traditionally, private equity firms have focused on brick-and-mortar companies. The targets are often underperforming – yet have strong cash flows and stable contracts.
But, recently, private equity firms have moved to tech companies. And some of the deals have been huge, such as the $17.6 billion buyout of Freescale Semiconductor, Inc. (NYSE:FSL) and the $11.4 billion Sungard buyout.
So, is this the beginning of a major trend?
The answer is "no" from a top credit analysis firm, Fitch Ratings.
Why?
First, tech companies are not ideal for loading-up the balance sheet with debt. That is, the free cash flow tends to be too low – or too erratic. Besides, there is "technology risk," in which a company's products can become obsolete from intense competitive forces.
Next, because of the dot-com implosion, many tech companies have already restructured operations. In other words, there is little opportunity for improvement that a private equity can provide.
Despite all this, Fitch did find a few attractive candidates for buyouts: CA, Inc. (NYSE:CA), Convergys Corporation (NYSE:CVG) and even Dell Inc. (NASDAQ:DELL).
Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Financial Statements.
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