It's no secret that technology companies--from chip suppliers to OEMs and EDA vendors--are increasingly popular targets for acquisition by private-equity investors. What's more, cash-stuffed funds appear to be trolling for some sizable fish; speculation has circulated that EDA giant Cadence Design Systems Inc., for example, is on firms' radar.

Indeed, in today's exuberant market, it's not unthinkable--though it's certainly still unlikely--that a deep-pocketed investor group might be so bold as to make a play for Intel Corp.

Many sources last week dismissed the potential buyout of Cadence by such firms as Kohlberg Kravis Roberts (KKR) and the Blackstone Group. But in recent months, private investors have reeled in or are in the process of landing CDW Corp., Freescale Semiconductor Inc., NXP Semiconductors and Avaya Inc.

And why not? Technology margins are robust, especially in the semiconductor segment,

with many companies boasting the strongly positive cash flows that are candy to investors.

Consider Intel from the perspective of a hypothetical bidder. Profit margins are sizzling--50.1 percent for the March-ended quarter, up sequentially from 49.6 percent. The 45-nanometer process is on track. Intel's management is strong, experienced and deep; its market share is solid and growing; product opportunities are opening up; and R&D spending and capital expenditures--$5.6 billion and $5.5 billion, respectively, for 2007--are high enough to sustain technology leadership.

Intel reported $7.7 billion in cash and other short-term investments for the March-ended quarter. Factor in the company's $2.8 billion in accounts receivable and $4.4 billion in inventories, and a determined private-equity firm could finance a portion of the hypothetical purchase with Intel assets.

Not that Intel is on the block. For one, its $126 billion market share (as of midday on June 6) means buying the company would require the determination, appetite and digestive capabilities of an anaconda. Even a 30 percent premium on Intel's stock price ($21.96 at the close on June 5)--the minimum needed to draw so much as a glance from its shareholders--would mean the potential buyer would have to fork out about $166 billion to close the deal.

So Intel's an elusive catch. But there are plenty of other fish in the sea.

Lest the industry get too full of itself, it's worthwhile to note that private-equity investors are not obsessing on the tech sector. "The private-equity people are looking at everything," said William Mitchell, chairman, president and CEO of distributor Arrow Electronics Inc. There's a lot of money sloshing around at equity firms, and investors don't want their funds languishing.

That said, electronics companies are attracting more private-equity interest now than at any point in the past. Our Intel analysis underscores the reasons: The tech companies that survived the last downturn emerged with cleaner balance sheets, keener operating strategies, lower head counts, leaner cost structures and resultant higher margins.

"The electronics industry is a lot more attractive now because we learned from the 2000 downturn," said Mitchell. "And the industry is now so big that there isn't a killer application that can come out and pull everything down. So the peaks are lower and the troughs are not as deep. We have steady growth that is more in line with world GDP growth rates."

Electronics companies are also generating considerable cash from operations. "Private-equity firms like companies with strong cash flows and good cash positions because they can use that as part of the deal," said Pip Coburn of consulting and research firm Coburn Ventures LLC.

Consider the Cadence rumors. A play for the EDA company would be like buying a midmarket home--a little expensive, but nothing a family with an average income couldn't handle. Given Cadence's market value of approximately $6.7 billion, its acquisition would represent an unremarkable transaction for the likes of KKR or the Blackstone Group.

So what makes Cadence attractive to potential investors? "A strong management team, a well-established customer base and steady, predictable, recurring revenues," Standard & Poor's analyst Jim Yin wrote in a research report.

Cadence has solid potential for revenue growth, as demand for its products is seen to rise over the short term. For the first quarter, it reported sales growth of 11 percent, to $365.2 million from $328.2 million in the year-ago quarter. Product margins rose to 93.42 percent from 90.2 percent.

Cadence's balance sheet is even more attractive. The company closed the last quarter with almost $1 billion in cash and short-term investments, relatively low inventories and zero long-term debt, although it is now showing higher convertible debt--$730.4 million, compared with $420 million in the prior year.

Still, whatever short-term or convertible debt Cadence has could be easily cleared out with available cash.

Page 2: Tech appeal lures private equity to ponder big deals
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