Mannerisms

NXP had a net loss of $367.15m in Q2, following on a similar loss in Q1. Freescale went from a $260m profit in Q206, five months before it was taken over by private equity, to a $288m loss eight months after it was taken over by private equity.

At the time of the takeovers, Freescale was valued at $17.6bn, NXP at $11.6bn.

Last November, shortly after the take-overs were announced, Wim Roelandts, CEO of Xilinx, reckoned: “If you have a down-cycle in the semiconductor industry, these investments are going to look very foolish.”

While there’s not a downturn, Q1 semiconductor industry revenues were down 6 per cent and Q2's were down 1 per cent which is not good, and the large semiconductor companies IDMs are not doing well at the moment. Fabless companies are growing faster than IDMs and that’s particularly apparent at the top end. While the top ten IDMs grew 7.8 per cent last year, the top ten fabless companies grew at 21.8 per cent.

In taking over two leading IDMs last year, the private equity people tried to justify the moves by saying that the semiconductor industry is now mature, it is cash-generative and the market is more stable than in its roller-coaster days.

“The industry is not maturing - look at this year’s DRAM and microprocessor price wars which have still not ended - there’s no end in sight to the roller-coaster dynamics”, said Malcolm Penn, CEO of Europe’s top semiconductor analysts, Future Horizons, earlier this week.

So, with NXP and Freescale doing worse than last year, and no one likely to buy them at last year’s high valuations, there seems no exit for the private equity funds, particularly with the current credit crunch in international debt making further private equity deals more expensive.

No doubt the private equity people have taken their dividends from the huge debts loaded onto NXP and Freescale, but that still leaves them with highly valued assets on their books which are finding it difficult to trade profitably. To say the least.

What will happen if NXP and Freescale cease to be able to generate the cash needed to pay back the interest on the debts with which they’ve been saddled is anyone’s guess.