A year ago, Accel-KKR Managing Director Thomas Barnds had to use every ounce of persuasion he could muster to get CEOs to take his calls. Now, his phone is ringing off the hook.

What made the difference? The largest technology buyout in history.

Last March, Menlo Park, California-based Silver Lake Partners assembled some of the biggest names in buyouts to orchestrate an $11.6-billion takeover of data management company SunGard Data Systems—making it No. 1 on Red Herring’s Top 10 Deals List.

Red Herring

With its steady cash flow and reliable revenue, SunGard seemed to bear out SilverLake’s theory that technology is now a maturing industry and predictable enough to be attractive to buyout firms.

Wayne, Pennsylvania-based SunGard reported profits of $454 million on revenues of $3.56 billion in 2004, up 22 percent from a year earlier. Three years earlier it reported profits of $246 million on revenues of $1.16 billion.

Big Spenders

“Technology spending has reached over half of business capital expenditures,” says Alex Slusky, the founder and managing partner of Vector Capital, a San Francisco-based private equity firm specializing in spin-offs, buyouts, and recapitalizations of technology companies. “It’s such a large part of the economy that it can’t grow much faster than the economy as a whole. The perception that this has become a cyclical industry rather than a growth industry is now accurate.”

Traditional buyout firms certainly showed the time was ripe for technology transactions. Boston-based Bain Capital, Fort Worth, Texas-based Texas Pacific Group, and New York City-based Kohlberg Kravis Roberts, The Blackstone Group, and even Goldman Sachs all signed up to gulp down a piece of the SunGard pie.

Goldman Sachs

One reason deals are drawing so many participants is simply that they are getting bigger. Seven of the top 10 buyouts this year were deals worth more than $1 billion each. And investors are fueling the buyout boom as they channel increasing amounts of cash to private equity firms.

At the end of the third quarter, buyout and mezzanine funds had raised more than $54 billion, surpassing their take for all of 2004, and putting them on pace to more than double the amount of capital they raised in 2003, according to data from Thomson Financial’s Venture Economics and the National Venture Capital Association.

Meanwhile, the average fund size has soared, from $330 million in 2003 to $443 million in the first three quarters of 2005. That trend is likely to continue as investors seek to put larger amounts of capital to work, and could well mean the number of syndicated deals will shrink as funds balloon.

Privatizing Pickup

And size mattered for technology executives last year, with the SunGard transaction shifting many of their views, according to Accel-KKR’s Mr. Barnds, whose Menlo Park-based firm buys privately held technology companies and boosts spending on areas like sales and marketing to accelerate growth and boost value. “There were companies that we had been calling on for six months or a year ahead of that transaction and trying to explain the merits of going private,” he says. After the deal went through, Mr. Barnds says the same CEOs started chasing him, “saying they wanted to really explore this and how they viewed it as their idea.”

With the SunGard deal, “2005 was the year tech buyouts went from the fringe to the mainstream,” says Mr. Barnds. CEOs went from viewing a buyout as a defeat to seeing it as a strategic initiative and a way to transform their business.

That’s certainly how Cristóbal Conde, the CEO of SunGard, saw his company’s leveraged buyout. “There was a disconnect between the long-term horizon of our employees and customers with that of our shareholders, which was far more short term,” he says. Now, SunGard can make more of the acquisitions that have fueled its growth without worrying about the damper a spending spree might put on its quarterly earnings and valuation by Wall Street analysts, he and the company’s new owners say.

Mr. Conde says the company’s plan to sell off its disaster recovery business, known as availability services, has been scuttled now that the company no longer has to persuade public-markets investors that keeping the cash cow fits the company’s strategy. But analysts are skeptical.

“We always felt the market didn’t value our cash-flow generation ability,” says Mr. Conde. “It’s a very, very predictable company. Our license sales are only 7 percent of total revenues.” In contrast, Oracle, the world’s third-largest software maker, garners more than one-third of its revenue from new license sales—a figure that rises to almost 80 percent when license upgrades and support are included.

Oracle

Deciding When and What to Sell

Still, SunGard’s heavy debt load—$7.5 billion in bonds and loans were used to finance the buyout—could push it to put one of its other divisions on the auction block, says Stephen Velgot, an analyst with Cathay Financial, a New York City-based research firm and institutional broker-dealer.

The company’s higher-education and public-sector arm, which builds software for school administrations and municipalities, is “the fastest-growing and sexiest part of their business,” he says. Revenue in that division nearly doubled in 2004, pushing profit margins up three percentage points to 15.5 percent, while margins either shrank or grew less than one percentage point in each of SunGard’s other two divisions.

To Mr. Velgot, a unit that looks that sexy is ripe for a sale. “They could potentially get a high price for that business, so why not sell it off?”

Because SunGard generates enough cash flow to not only cover debt-service costs but also to fund more cash-generating acquisitions, answers Mr. Conde. In 2004, the company reported it earned $785 million in cash from operations, a 22 percent increase from the previous year’s $645 million. Except for a decline in 2003, the company’s cash flow has grown steadily for a decade.

And the game, according to SilverLake, calls for using equity efficiently to generate growth: Rather than leave cash on their balance sheets, it’s time for technology companies to use leverage as a cost-effective way to fuel expansion.

So what’s ahead? Buyout firms will likely look for more big deals as corporate finance wizards seek to convert more equity into debt. The best ones obviously will combine savvy financial engineering with strategic operational improvements to boost bottom lines.