IBM, the world's largest computer and IT services company, could become an acquisition target for private equity firms said Steve Bengston, managing director at PricewaterhouseCoopers.
Mr Bengston was speaking at a recent lunch panel on trends and predictions for 2007 organized by FountainBlue. Also on the panel was Fred Greguras, a top lawyer at Fenwick and West, and Rick Ellinger, a venture capitalist with WCA Technology, and myself.
Private equity firms are raising ever larger funds and making ever larger acquisitions, some as large as $35bn, said Mr Bengston. At that rate, it is only a matter of time before even some of the largest tech companies become targets.
IBM has a current market capitalization of about $145.5bn. To take the company private would require a premium to be paid. But several private equity firms could potentially finance such a deal.
"IBM is a perfect candidate for private equity firms, there is a lot of restructuring that could be done," said Mr Bengston.
If such a deal were to happen, the new owners would be free to breakup the company into several large business groups. This is a strategy that IBM considered before Lou Gerstner took over as CEO in 1993. He spent nearly ten years restructuring IBM but keeping its major business groups intact.
Mr Gerstner retired from IBM in December 2002 and is now a member of the Carlyle Group, one of the world's largest private equity groups. It would be ironic if Mr Gerstner were to be brought in to help take IBM private and then possibly break it up.
Fred Greguras from the top Silicon Valley legal firm Fenwick and West, said that private equity firms are fast becoming large players in Silicon Valley, and are acquiring lots of startups.
Private equity firms also target large public companies private then apply financial engineering to restructure the companies. They are then sold to other private equity firms or they go public again. The profits on such deals can be huge and there are also massive fees that the private equity firms collect from the companies they acquire.
However, there are concerns that private equity firms are loading up companies with high debt loads which will make them more vulnerable during economic downturns. And the huge amount of money flowing into private equity funds is likely to result in new regulations.
Here is the market capitalization of some of Silicon Valley's largest companies: Intel at nearly $120bn, Cisco Systems at $161bn, Hewlett-Packard at $114bn, and Oracle at $88bn.
Google has a market cap of $147bn and it is controlled by its founders and early investors which protects it from a hostile acquisition. Microsoft has a 301bn market cap.