Mannerisms

People at Electronica reacted warmly to the fears about the private equity funds expressed by Xilinx CEO Wim Roelandts who dubbed them get-rich-quick schemes for a few individuals at the expense of companies’ long-term strategies.

“Wim’s saying what everyone else is thinking”, is a typical response.

The takeover of NXP and Freescale by these funds has sent ripples of fear through the industry’s customers and managers.

The fear was evident at the Electronica Forum where two CEOs who have had their companies bought by these funds, Frans van Houten of NXP and Michel Mayer of Freescale, defended the funds to a standing-room only audience.

Linear Tech’s CEO, Lothar Maier, meeting customers on the Linear stand, said that a lot of customers have been asking him about it because Linear Tech is often mentioned as a potential buy-out candidate, and its customers are worried that they won’t get the same level of support as they do now, from a company which could be run only to meet the financial targets of a small group of investors.

Managements are worried because they see their companies being destroyed by a rush for excessive short-term profitability at the expense of long-term sustainability.

Talking to executives at the companies which have been taken over suggests that they are being fed the message that it’s business as usual. No significant changes are planned.

But at one of the bought-out companies, Freescale, it appears that none of the management have been formally engaged to run the company after the buy-out which was announced two months ago.

Meanwhile Freescale’s customers are anxiously seeking reassurances about future strategy from managers which don’t know if they are part of that strategy.

There is the fear that the private equity funds will parachute in their own top managers with orders to slash R&D, burn investment plans, sell-off business units and dump long-term strategy to maximise short-term profitability.

Adding to the general misery is the secretiveness of the private equity fund which insist that they are ‘private’ and apparently regard themselves as answerable only to their investors.

And who are the investors? Rich guys who simply want to get richer.

The Freescale acquisition gets curiouser and curiouser. First there was the $17bn+ value put on it compared to the $11bn valuation put on NXP – both similar-sized companies.

This was partly explained at the time by saying that the new owners would get rid of fab costs. But with Freescale fabbing 80 per cent of its chips internally, this can’t be done quickly.

Another part of the explanation for the valuation was that they’d bought Freescale at the bottom of the semiconductor cycle. No one else thinks it’s the bottom of the semiconductor cycle.

Then came the loading up of Freescale with vast amounts of debt. The companies’ customers are already worried if the company whether Freescale will be able to afford the interest payments. Freescale generates $1bn of cash a year, but how much of that will be needed to service $7bn+ of debt? Maybe most of it.

Then, bizarrely, two months after the annoucement of the deal, it appears that the management haven’t been engaged by the new owners to run the company yet.

There is little to be gleaned from the private equity fund owners about their intentions. They like to stress their privacy.

So everyone remains in the dark, customers, suppliers, management, and even Her Majesty’s Press.

In his book, Merchants of Debt: KKR and the mortgaging of American business, George Anders tells the story of how Kohlberg Kravis and Roberts (KKR) invented the private equity company buy-out industry and loaded up corporate America with debt via highly leveraged deals which took public companies private.

Some of the companies prospered, more often they did not. In almost every case the dealmakers made a nice return.

Attitudes to the private equity funds vary widely across the semiconductor industry.

With Blackstone astonishing, and alarming, some in the semiconductor industry with the size of the price it paid for Freescale, will it get its sums right in a newly rumoured bid it is said to be entertaining for a controlling stake in India's third largest wirless telephone network operator?

Warnings from Xilinx CEO Wim Roelandts that some of the private equity buy-outs could look ‘very foolish’, has been backed by Jon Moulton, founder of Alchemy, the UK venture capital firm, by Standard and Poor’s, the credit rating agency, and by a deputy governor of the Bank of England.

NXP has announced a small profit for the last nine months of trading, a position which its new owners, a consortium of private equity funds led by Kohlberg Kravis and Roberts (KKR), may see as unsatisfactory in view of their plans for an IPO.

Managers of companies bought out by private equity funds are seen resorting to savage cuts to pay the interest on huge debts taken on to finance the deals and give pay-back to the private equity owners, meanwhile allegations of collusion to force down buy-out prices are being made against private equity companies KKR and Blackstone.

The good old British Trade Unions might have found a new role for themselves as defenders of British employees against the private equity funds seeking to ruin many European businesses.

So now it’s Infineon being targeted by the private equity funds. Is this a cunning plan by US financiers to knock out the European semiconductor industry?

Europe looks like retaliating against the private equity funds which bought semiconducfoctor companies NXP and Freescale last year and are said to be sniffing around Infineon.

Last night the head of the TUC turned the screw on the private equity funds calling them ‘amoral asset-strippers’ and ‘casino capitalists’, and calling on pension funds to ‘look long and hard’ before investing in private equity funds. http://www.ft.com/cms/s/d95fdd3a-c124-11db-bf18-000b5df10621.html

In a bad 24 hours for the private equity companies, a leading City businessman has added his two penn'orth to the storm of criticism heaped on private equity funds by the general secretary of the TUC. http://ftalphaville.ft.com/blog/2007/02/21/2650/myners-warns-of-risks-of-private-equity/

Damon Buffini, head of Europe's largest private equity company, Permira, broke cover this morning to talk on BBC4..

The private equity guys don't do themselves any favours. Either they have zero class, or they just don't give a damn, but their annual shindig this week is called the SuperReturn conference.

Freescale could be in for a large number of resignations early next month when, so it is alleged, stock options have to be cashed in under the new deal for managers following the private equity buy-out.

If stock markets continue to go down, it poses a question for the private equity firms who have been paying top dollar for companies: How do we sell them?

Good news for everyone worried that their favourite High Street retailer is about to be snaffled up by a ruthless Wall Street predator, is that the private equity industry looks as if it is running for cover.

Hopefully the collapse of the bid for Sainsbury's will come to be seen as the point at which the private equity tide started its retreat.

Following on the bloody nose dealt out by Sainsbury's to private equity company CVC Capital Partners, the Dutch parliament has delivered a good kicking to CVC at a meeting in The Hague.

Further evidence that the scourge of private equity is retreating from our shores comes with a report from the Centre for Management Buyout Research (CMBOR).

It's funny what people will say in the heat of battle. Remember Tony Blair's assurance that Iraq had weapons of mass destruction which could be deployed in 45minutes? That was said in order to win a Commons vote to go to war in Iraq.

It's always interesting ear-wigging the big-wigs at industry events and at last night's Forum Fiesta dinner of the IEF2007 conference in Athens, there was a recurring theme to CEOs' conversations - private equity.

Well it all gets a little clearer now. The CEO of Boots gets £6.5m from the sell-out deal to private equity company Kohlberg Kravis and Roberts, while deputy chairman Stefano Pessina gets £500m.

It's not often you see a semiconductor industry forecast come true, and particularly unusual to see one come true as quickly as Xilinx CEO Wim Roelandt's forecast following the private equity takeover of NXP.

On June 20th the murky world of private equity may become a little more understandable when the Treasury Committee of MPs examines executives from five private equity companies, Blackstone, KKR, 3i, Permira and the Carlyle Group, to find evidence about their activities in three areas:

What would Cicero have thought about Apax giving up its venture capital activity to concentrate on buy-outs?

It's only June and mergers and acquisitions deals are over $2.3 trillion and set to beat last year's record of $3.6 trillion. On average, this year, buyers have paid a whopping 50 per cent over market capitalisation for their acquisitions, double the premium paid last year.

It's a tough old world for aspirant billionaires. Apparently some hedge funds are making it a pre-condition for taking on a new partner that the new partner secures a 'post-nup' agreement with his or her spouse.

John Daane, CEO of Altera, reckons that you can't blame the private equity funds for bad decisions, but you can blame the managements which sell out to them.

So far, the furore over the private equity industry seems to have boiled down to a Gordon Brown cock-up. By mucking up a tax concession, he has encouraged financiers to switch from venture capital investment to private equity buy-outs.

Government investigations into the private equity industry have begun to expose it for what it is: a witty wheeze.

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.

The new Chancellor of the Exchequer, Alistair Darling, has told the Guardian that the tax breaks enjoyed by private equity companies may be curtailed either in the Autumn pre-budget report or next year’s Spring budget.

It probably won’t do the managements of NEC Electronics and Samsung Electronics much harm to have the chill breath of private equity scrutiny blowing down their necks, after all they’re big boys, and can look after themselves.

Hearing that the private equity companies KKR and Blackstone were in talks, now suspended, to buy the EDA company Cadence, took me back to a dinner in Greece in April where the CEO of an EDA company was saying he gets about ten calls a week from private equity people. "They don't propose anything specific. They just say: 'Let's talk'", he said.

How quickly the private equity’s sortie into the semiconductor industry has run into trouble. Before the year is out since Blackstone snapped up Freescale and KKR bagged up NXP, both the acquired companies are running into trouble.

Tax paid (or rather not paid) by private equity funds should be investigated by the Inland Revenue, says today’s report by the Treasury Select Committee of MPs which has been investigating private equity companies.

I see from the CNNMoney page that some stock market analysis report called Next Inning Technology Research is asking whether it’s a good time to invest in Micron and Qimonda.

Now you know why bankers are so secretive. It’s because they haven’t got a clue, and that's something they very much want kept secret.