Mannerisms

Both have pulled out of Crolles2, the European R&D consortium, NXP has closed down a fab at Boeblingen, and has also sold off its cordless and VOIP phone chip business.

But NXP has also made some purchases. It bought 10.7 per cent of SSMC, the Singapore fab, it has bought the cellular communications operation of Silicon Laboratories, and it has bought the ARM-based microcontroller business of Sharp Microelectronics.

“We want to gain leadership in the market for ARM-based microcontrollers,” said Pierre-Yves Lesaicherre, senior VP and general manager of the standard ICs operation at NXP. According to Lesaicherre, NXP’s owners did not object when NXP suggested the Sharp acquisition.

Maybe NXP was fortunate in that the $11.6bn valuation put on NXOP seemed a bargain price when compared with the $17.6bn valuation put on the similarly-sized which seemed extraordinarily high to many in the semiconductor industry.

Whether this high price, and the concomitant requirement to pay interest on a higher level of debt, has made the difference to the experience of NXP and Freescale is can only be guessed at.

But, in contrast to NXP’s experience, Freescale’s private equity experience is turning out to be a litany of woe.

Following the buy-out, Freescale was loaded up with nearly $6bn worth of debt in the form of ‘toggle bonds’, which are ‘covenant-lite’ junk bonds, involving Freescale in large interest payments.

At the time of the buy-out, Freescale had free cash flow of $1bn, and one assumes that a large chunk of that is needed just to service the $6bn junk bond debt.

It was assumed, at the time of the buy-out, that Freescale would try to maximise cash-flow to meet these interest payments. One way to do that, it was thought, would be to cut back on its own manufacturing and put its wafers out to foundry.

Earlier this year, Freescale abandoned its third share in the pan-European Crolles 2 partnership developing basic process R&D for chip manufacturing and said it would, instead, get its process from an IBM-led consortium. That led to the collapse of Crolles2.

Freescale and Infineon are what is called ‘joint development partners’ in the IBM consortium while Samsung, Chartered and IBM are ‘common platform’ partners. The goeal is to have a 32nm process by 2009. the development is done at IBM's facilities in East Fishkill, New York.
By all accounts IBM is very much the dominant partner.

Now Freescale management has told 1,250 workers at its East Kilbride site that the company is looking for a buyer for the fab. After 38 years at East Kilbride, generously supported by the Scottish authorities over the years, it looks as though semiconductor manufacturing at East Kilbride may end.

In a sign of harsher things to come, Freescale has reduced capex from 9 per cent of sales to 7 per cent. Freescale has reported weak demand from its best customer, Motorola, significantly reducing its revenue stream.

The writing was on the wall for Freescale when Motorola bought TTPCom which gave it exposure to a wider range of technologies and processors than Freescale commanded.

The vulnerability caused by reduced wireless revenues, 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.

Another big difference between the two companies was in the level of hand-outs to the two CEOs involved.

Whereas NXP’s Frans van Houten got a mere $1m, Freescale’s Michel Mayer, got $20m, under an agreement which said that Mayer’s shares should vest immediately.