Even before the explosion of the Internet in the mid-1990's, the technology services sector was undergoing rapid expansion. As businesses started to move onto the Web, they realized that they needed the assistance of companies dedicated to the complex tasks of managing online security, storage, data and applications. Hosting and collocation companies, managed services providers, security management firms and many others stepped up to fill this need.

Of course, this sector witnessed a drastic downturn in the first years of this decade. But the firms that survived the technology "nuclear winter," often by absorbing the businesses of their less agile competitors, now enjoy a steadier - if slower growing - business environment. On top of this renaissance, in a parallel to the outsourcing of manufacturing, the phenomenon of fungible global labor markets has allowed businesses to outsource work to low cost labor areas of the world.

The financial needs of technology services companies reflect these changes. Whereas in 1999, venture capitalists would compete to invest in a promising new firm, today the environment - and valuations - are far more sober. Lenders who found themselves awash in servers after the bubble burst are reluctant to repeat that mistake today, so establishing collateral is more difficult. But there are also a host of opportunities. IT budgets are finally on the rise again. Valuations have risen, making a sale more attractive to those companies who were able to ride out the downturn.

Investors are attracted to the recurring revenue nature of companies in this sector. This positive element is balanced by the need for capital investment, though some companies have outsourced their infrastructure. Valuations in this sector calculated in one of two ways. For mature, more stable companies, a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization) is typically used, usually ranging from 4X to 8X. Where a company falls in this range depends, among other factors, on the revenue growth, margins, the quality of the management team, and the customer retention rate. Earlier stage companies that lack EBITDA are typically valued as a multiple of revenue, ranging from 0.5X for a troubled entity, to 2X or even higher for rapidly growing firms in an attractive sector.