LBOs May Be DOA in 2008

Last summer’s collapse of the leveraged buyout technology market is expected to carry over well into 2008, according to a new survey of tech investment banking by the 451 Group. If so, the slump would snap a string of five consecutive record years of mergers and acquisitions.

While more than two-thirds of technology bankers surveyed expect to see growth in investment banking activity for 2008, LBO projections were far more optimistic. Although a record $172 billion was spent on buyouts in 2007, almost all of that was invested in the first half of the year.

Since then, the credit market collapse and the reverberating consequences have battered plans for 2008 LBOs.

“Just as business across virtually all products is expected to slow in 2008, bankers indicated business across virtually all sectors of technology will also decline,” the 451 Group report states. “When surveyed about M&A [mergers and acquisitions] in 14 specific markets, bankers projected growth in just two areas in 2008: hosting/IT services and storage.”

According to the report, tech bankers also predicted declines in other tech sectors in 2008. The largest declines for deal flow were predicted to be semiconductor companies and their suppliers, landline telecommunications businesses and communications/network equipment vendors.

The top two ranked tech sectors — Internet content/commerce and mobile technology — were projected to post modest declines in deal making.

Nor are the survey respondents counting on a near-term comeback. More than one-third of those surveyed projected tech buyout spending would actually decrease in 2008.

“We note that the sectors expected to post the largest declines are ones that typically tap the credit markets to get their deals done,” the report states, underscoring the ongoing impact of disappearing credit lines.

Tracking the outlook for LBOs, the survey also noted tech bankers are also bearish on IPOs for 2008.

Predictions for new stock offerings hit as 75 in the survey, roughly matching the tech IPOs for 2007. However, the median prediction was a more sobering 25.

Bankers from firms with 50 or more professionals — a group that the Boston-based 451 Group claims might have a broader view of the entire IPO supply chain — predicted approximately 35 IPOs for 2008.

According the report: “All of that is expected to substantially alter the banking landscape in the coming year. Tech banking could become a bit more desert-like, with bulge-bracket firms more likely than ever to pull out of tech banking and more respondents expecting boutiques to go under.”