Despite Problems, IT Attractive To P.E. In ‘07

Nov 30 2006 | 9:54am ET

Their debt levels are skyrocketing and their valuations are high, but that won’t stop private equity firms from buying U.S. information technology companies, according to Fitch Ratings’ 2007 credit and operating trends outlook for the sector.

According to Fitch, tech leveraged buyouts will continue next year, even though “the list of attractive technology targets remains short,” with buyers attracted by maturing growth rates, consistent free cash flow and conservative capital structures. Also, Fitch notes, p.e. firms will have to put their money somewhere.

“LBO speculation and activity will be driven by strong private equity fund inflows, a favorable credit environment and relatively stable demand for IT,” Fitch said in a release. It warned, however, that the technology cycle could be peaking, and the sector offers fewer obvious opportunities for cost reduction.

Thanks in part to expected LBO activity, the IT sector’s debt level is set to reach historic levels. Fitch estimates that it will rise by 40% to $140 billion in 2007, driven primarily by refinancings.

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