Are things going a bit awry at Freescale? Lay-offs, and a capex cut from 9 per cent of sales to 7 per cent, are making people a bit edgy about the outcome of last year’s buy-out.
Everyone in the semiconductor industry was amazed at the valuation put on Freescale Semiconductor when it was bought out by a consortium led by private equity fund Blackstone.
Compared to the $11.6bn valuation put on the similarly-sized NXP by another buy-out consortium, the $17.6bn valuation put by Blackstone on Freescale seemed extraordinary.
Then, as is the way with private equity, they loaded up the company with massive debt, from which they no doubt took their dividend, and left the company to the vagaries of a brutally competitive market.
This is OK, so long as the company generates enough cash to pay the interest on the debt, but credit analysts Standard and Poor’s have pointed out that the average cover (of cash generated vs debt payments) for buy-out firms has slipped to 1.7 times this year, compared to 2.4 times last year, and 3.4 in 2004. They point out that cuts in revenue for a heavily indebted company can leave it very vulnerable.
Freescale was doing well at the time of the takeover. An extensive re-structuring had been completed. The market was solid. It had a good wireless business going with its old alma mater Motorola.
The weight of debt obviously seemed justifiable, at the time, to a financier, but the semiconductor market is a fickle beast.
Freescale has now reported weak demand from its best customer, Motorola, significantly reducing its revenue stream.
The vulnerability this causes Freescale in its heavily indebted state, could be a boon to wireless rivals like Infineon, Qualcomm and Texas Instruments, according to analyst Doug Freedman, at American Technology Research, recently quoted in the New York Times.
Freedman said Freescale may either sell its wireless business or reduce investment in it. In a cut-throat business like wireless, reducing investment is tantamount to handing market-share to the competition.
It’s a nasty dilemma. Several leading semiconductor industry CEOs at the time of the Freescale buy-out questioned whether the private equity people understood the sometimes dramatically shifting vagaries of the semiconductor business.
They assured us they did, but it seems that they didn’t.
Of course Freescale CEO Michel Mayer won’t be too inconvenienced. Part of the deal for the takeover by Blackstone was that Mayer’s shares vested immediately.
So he got $20m.
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