In 2006, Tech Finance recorded 87 instances of private equity companies making purchases in the tech sector. In 2005, 64 such deals were tracked, down from 2004 when 78 deals were recorded. In 2003 there was 75 deals.
What this shows is that private equity purchases within the tech sector has reached a three-year high, after a marked increase in such deals during 2006, compared to previous years.
It is also clear that the value of these deals has been steadily increasing. In 2003, the total value of private equity M&As in the tech space was just $11.8bn, but in 2004 this had more than doubled to $28.7bn. In 2005 the value once again doubled to $56.6bn, and in 2006 the total value of deals increased once again to $62.5bn.
So what sectors in the tech industry has been attracting the most private equity interest? Well, according to the data compiled by ComputerWire’s Tech Finance team, the generic enterprise software industry retains the most interest for private equity buyers. This is somewhat surprising, considering the record levels of investment pouring into internet, multimedia, and mobile-related startups at the moment.
Besides the enterprise software market however, it seems that the IT Services area has attracted the most private equity interest in recent times, with 20 acquisitions of Services-related companies in 2006. The Services sector is attractive to private equity groups as often these companies often have predictable revenue streams from long-term contracts. The scope for breaking off divisions and selling units is also greater with services-related companies. In the generic software sector, private equity outfits seem more intent on creating a sector champion.
Our View
For tech companies, it is clear what the benefits are from private equity ownership. Conventional commercial operations often face tremendous pressure to survive in a highly competitive market-place. This can lead them to make compromises (either in product or in strategy) in order to get money through the door. With private equity ownership, these money constraints are often less pronounced, meaning that these companies often have the luxury of getting their strategy and product set absolutely right before going to market.
It is also clear that venture capitalists are happy to see more private equity buyouts in the tech sector, as it gives them another exit strategy for their long-term portfolios. Indeed, back in December a survey from the National Venture Capital Association found that 71% of investors predicted that buyouts by private equity firms would become an increasingly attractive exit option during the coming year.
