Can Blackstone Manage Freescale Long-Term?

“The private equity companies operated on the premise that debt was cheap. But debt is not cheap any more”, Malcolm Penn, CEO of analysts Future Horizons, told the recent IFS2008 meeting, “now they can't sell those companies which they acquired. They have now got to make them work. They've got to get good operations guys who can make them work.”

The acquisition everyone is looking at is the Blackstone acquisition of Freescale Semiconductor. At the height of the private equity acquisition frenzy, in September 2006, Blackstone bought the company at a valuation of $17.6 billion.

Even at that time, in the midst of many over-priced deals, the valuation attached to Freescale astonished the semiconductor industry.

Then Blackstone loaded up Freescale with $9 billion of debt.

Since the deal, not only have the funds for buy-outs dried up, meaning Blackstone has no chance of selling on Freescale at a profit, but Freescale’s best customer, Motorola, has suffered a collapse in its cellphone market share, from 20.3 per cent in Q406 to 12.4 per cent in Q407, which means it is buying considerably less product from Freescale.

Freescale’s revenues declined 10% in 2007, some 700 people were laid off, manufacturing capacity is down to 75 per cent, cash-flow fell 18 per cent, networking, automotive and microcontroller revenues were flat and sales of wireless ICs were so sharply reduced that Motorola began paying Freescale compensation payments under terms agreed when Freescale was spun out of Motorola.

Now the extraordinary twin suggestions have emerged that Motorola may sell off its cellphone business, and that Freescale may sell off its wirless chip operation. These were the jewels in the two companies' crowns.

If Motorola sells off its cellphone business, then Blackstone will have a hell of a job on its hands trying to manage Freescale in a way that will minimise falls in Freescale's value.

Likewise if Freescale pulls out of wireless chip-making, hitherto a core competence.

Without any sort-term prospect of getting its money back, Blackstone will have to hold onto its investment or sell at a loss.

If the former, then we'll see if Blackstone can manage a complex business for the long-term.

With Freescale case, as with many other acquisitions, the much-vaunted management capabilities of the private equity companies are going to be put to a tough test.