Values down, rebound misses information technology firms. (Investments & Finance).

STOCK markets have rallied in recent weeks, with the Dow Jones Industrial Average last week 17.5 percent above a closing low of 7286.29 set on Oct. 9. But the improvement doesn't necessarily carry over to other areas of the capital markets -- particularly information technology.

"In the IT space, I think 2003 is shot," said Frank Kline, founder and general partner of Kline Hawkes & Co. His Brentwood shop, one of the oldest names in venture capital investing in Los Angeles, hasn't done any deals this year.

"I can invest today and they're going to come back in 12 months looking for more money," Kline said. "It's not the kind of deal we want to do."

Sometimes it's the prospective fundees who pull the plug. Many start-ups are trying to conserve the cash they raised earlier to get through the economic slowdown, Kline said. They don't want to sell equity at fire-sale prices.

Recently, Kline Hawkes spent five months researching a $6 million investment in a venture-backed company that is actually making money on a cash-flow basis. The company, operating in the health care services arena, had partial bank financing to acquire two smaller companies for about $21 million -- both cash flow positive as well -- and needed the additional $6 million in equity funding to bridge the funding gap.

At the last minute, both acquisitions fell through. One of the prospective acquisitions, based in San Diego, took a higher offer from a corporate buyer. The other seller, based in Orange County, decided to wait.

So when will things turn around?

First, mergers and acquisitions need to pick up, according to Kline. He's looking for some big M&A deals to get things rolling in 2003.

Lloyd Greif, chief executive of local merger shop Grief & Co., thinks it will be smaller deals that pave the way.

He said that banks, which cinched back their lending ratios in 2001 and in the first half of 2002, have at least steadied, if not yet expanded lending formulas. Greif expects to see incremental improvement in the M&A scene, in a number of going-private transactions, or companies selling out to private equity or corporate buyers, until the initial public offering market improves.