Technology investments are experiencing a revival not seen since the melt-down in 2001 and 2002 (Currier, E-Commerce Times, 2006). Bourses across the globe have seen the prices of tech stock rebound and surge. Total return on the stocks comprising the tech-heavy NASDAQ index is over 20% since end-July 2006 compared to 10-15% for the S&P 500 and the Dow Jones indexes. While some tech stocks have languished, several companies such as Google and Cisco have performed admirably. With the Indian software and IT enabled services sectors rapid enjoying a 80% growth in revenues between 2004 and 2006, tech stocks have appreciated significantly in recent years. While many recent tech acquisitions were dwarfed by the 1.65 billion USD price paid by Google to acquire YouTube, the Indian market has been intrigued more recently by the big premiums over market price reportedly bid by suitors to acquire Hutchison’s stake in their Indian mobile telephone company.
Reasons for the recent boom in the tech sector are evident. The bursting of the first tech bubble in 2001 depressed corporate investments in IT for several years. Many companies in the USA and Europe had upgraded their IT in 1999 in anticipation of the Y2K (year 2000) and Euro conversion problems for their software systems. Much of this infrastructure from the turn of the millennium is now getting stretched as these companies have continued to grow faster than their peers (Anderson, Banker and Ravindran, Management Science, 2006)

To continue to increase productivity, corporate America has been spending more on IT recently. The telecom sector is also growing now with the excess optical fiber capacity (for telecommunication) held over from 2001 being almost fully absorbed in recent applications. In addition, the rapid build out in telecom capacity in fast growing economies such as China and India is creating even greater demand in the telecom sector. Because of this spurt in demand for software, hardware, telecom, and information services, free cash flows of tech companies have increased significantly recently, making them particularly attractive as leveraged buy-out targets for private equity firms. The Capital Roundtable reports that spending by private equity firms in the USA to acquire IT and telecom companies doubled to 50 billion USD in 2005 and grew a further 25% in 2006 (www.capitalroundtable.com)

Valuation Uncertainty:
Will there be another melt-down such as the one we experienced in the USA in 2001? Experts think not. This time companies have been much more cautious in evaluating IT investments based on hard-nosed analysis instead of wishful thinking and herding behavior experienced in the late 1990s, and have paid more attention to maintaining strong balance sheets. The tech companies also have not built out large expansions in capacity that may berendered redundant in case of a small downturn in demand.