Mannerisms

“A number of customers have asked us about it”, says Lothar Maier, CEO of Linear Technology Corporation (LTC), “customers are concerned that too many of their supplier companies might end up as private companies, and they won’t be so supportive of them when they’re in the hands of people who are trying to enhance the performance of the company at the expense of the customers.”

“My personal opinion is that I don’t think Linear is a particularly attractive opportunity for the private equity market because we are a good performing company for the market, and have good execution performance, and it’s difficult to believe people could come in and do better”, adds Maier, “we’re valued at nine times sales so we would be very expensive. Freescale was bought on a valuation of three times sales. Freescale would have been valued at $50/60bn if bought on a valuation of nine times sales.”

At ASML, the world’s No.1 lithography equipment company, CEO Eric Meurice says: “We’re very proud of our management. It’s pretty hard to do better. The balance sheet is very strong. We don’t see ourselves as a prize.”

At STMicroelectronics, COO Alain Dutheil says: “If someone came knocking on the door we would look at it professionally, and ask what would it bring to the company what would it bring to our people, and what sort of programme we could put in place.”

A forthright view comes from Wim Roelandts, CEO of Xilinx. "Private equity buy-outs are schemes for a few people to get rich quickly. They may not look at the strategic direction of a company. They buy a company, leverage the hell out of it, sell bits and pieces, cut the R&D spending and go public to get their money back,” says Roelandts, “whatever they say about returning value to the shareholders, what they’re really doing is putting value into their own pockets. I could make Xilinx very profitable by cutting out the R&D, and it would have no effect on the company for a couple of years.”

Asked why he thought the private equity people are targeting chip companies, Roelandts replies: “First they have a herd mentality, like VCs; second, a lot of people see semiconductors as a more mature industry. I think they’re wrong.” Inevitably, the success of private equity investments relies on future growth in the semiconductor market, which is notoriously cyclical. "I think there are still up-cycles and down-cycles and, if we have a down-cycle in the semiconductor industry, these investments are going to look very foolish,” says Roelandts.

Many industry executives agree with Roelandts. “Wim’s saying what everyone is thinking”, is a typical response.

Denis Griot, senior vice president and general manager at Freescale, which was recently bought be private equity funds, points to the advantage of being relieved from the quarterly reporting burden which stock exchange listed companies must follow.

“All this attention to quarterly disclosure will be gone,” says Griot, “giving us some good, focused, more enduring strategies to deliver the cash and the dividends, but not with the same trepidation as being measured every quarter.” Instead Freescale will be able to focus on longer term programmes with an annual accounting period.

“The main concern of customers is will we be able to pay our interest payments [on the debt used to buy the company which is now owed by Freescale]. But we are generating $1bn cash a year.”

Asked if the new owners would slash R&D, Griot replied: “Our industry is based on constantly refuelled innovation. We spend 25 per cent of revenues on R&D. I can be positively affirmative that it will continue to be so.”

At another company which has been bought by private equity funds, NXP, CEO Frans van Houten says: “It’s a buy and build premise”.

van Houten points out that the the private equity funds see three value 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.

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.”
Peter Gardner, Technology Sector Head for Wireless at 3i Group the venture capital investors, says: “Going private 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, and, also, private equity ownership provides opportunities to merge businesses together to produce more integrated solutions.”

The worry for many companies is that, while private equity owners may be relatively benign proprietors in the good times, they could become insistent on drastic, damaging and unpleasant measures if times become hard.