In his book, Merchants of Debt: KKR and the mortgaging of American business, George Anders tells the story of how Kohlberg Kravis and Roberts (KKR) invented the private equity company buy-out industry and loaded up corporate America with debt via highly leveraged deals which took public companies private.
Some of the companies prospered, more often they did not. In almost every case the dealmakers made a nice return.
KKR led the consortium which bought out NXP Semiconductors from Philips. So how does the CEO of NXP see the Merchants of Debt?
“The private equity funds have capital, and the semiconductor industry needs a lot of capital”, replies Frans van Houten, CEO of NXP Semiconductors.
With Philips corporate more inclined to invest elsewhere than in its semiconductor division, van Houten thought the investment needed for future growth would best come from outside.
“It’s a buy and build premise”, says van Houten. He says that the private equity people see three value creation drivers: the semiconductor industry is growing faster than GDP, so value doesn’t only come from cost-cutting, it comes from growth; second, operating ratios (e.g. SGA/sales, ROI, margins etc) can be improved and private equity investors have the experience to help to improve industry benchmarking and operational excellence; third, investors can help facilitate industry consolidation.
In addition, van Houten adds: “Our investors can help us get into customers I couldn’t serve before. Before the deal was closed I was introduced to new customers I was finding it hard to get into before.”
Another positive view of the private equity companies comes from Peter Gardner, Technology Sector Head for Wireless at 3i Group the venture capital investors.
At the recent Silicon South-West meeting, Gardner pointed out that there were a couple of reasons why private equity funds had a positive contribution to make to the industry.
“The first one is that it allows restructuring within some of these companies. Sometimes it’s difficult for public companies to do spin-offs, but the spun-off businesses which will come out of these companies will have great ideas that will take on a life of their own,” said Gardner.
“Secondly”, added Gardner, “private equity ownership provides opportunities to merge businesses together to produce more integrated solutions.”
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