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.

One of the lessons of the tragedy of East Kilbride is: Get Unionised. The 900 workers at Freescale Semiconductor’s fab which has been put up for sale are not in a union recognised by the company. It looks now as if they should have been.

On the one hand they’re trying to tell us they’re ethical, socially useful guys; on the other hand they’re buying debt in companies they own at discounted prices. This is the wacky world of private equity.

Interesting how Wall Street is pursuing the Japanese semiconductor industry. Back in April I met a CEO of one of Japan’s top five chip companies saying he got calls every day from private equity firms wanting to talk to him.

Every cloud has a silver lining, and the lining on the credit crunch cloud could be a boost for venture capital.

The Japanese semiconductor industry is all a-flutter as it appears that one of their number is to be taken over by a private equity company.

The chickens are coming home to roost, nasties are emerging from the woodwork, and some esteemed bankers are looking like silly wankers.

Freescale Semiconductor’s private equity owners, a consortium lead by Blackstone, are causing great distress to the 900 workers at the East Kilbride fab by refusing to answer any questions about their future.

Yesterday the government decided it would make some changes as a result of the low tax rates enjoyed by partners in private equity houses. Instead of 10 per cent tax on their profits they’ll now pay 18 per cent.

After the orgy of excess come the hangovers, the bills, the recriminations and the insults. This week, a Tory MP called the credit rating agencies ‘an absolute shower’ and a private equity CEO called the bankers ‘whimpering dogs’.

Private equity is making lousy returns for its investors, according to a French Professor from the HEC business school in Paris, in a survey submitted to the European parliament last week.

The World Economic Forum in Davos was the venue for the launch of a survey of the private equity business by the Harvard Business School. It concludes that private equity takeovers don’t have much effect on the companies they buy.

The credit crunch has not, it seems, quenched the ardour of NEC Electronics’ stalker, the US hedge fund Perry Capital.

The sudden change in the fortunes of the private equity industry have left the industry having to do what it doesn’t like to do – manage its acquisitions for the long-term.

Did Michel Mayer dig his heels in at Freescale? One wonders whether the private equity owners of Freescale were pushing him to take measures which he could not stomach.

Having Rich Beyer taking over as CEO of Freescale, could be good news for Freescale's IC designers. Beyer has a record of liking designers and rewarding them well.

A measure of the challenge which Rich Beyer has taken up in becoming the new CEO of Freescale, is described by the ratings agency Fitch.

The dread day dawns. Earlier this week I go to work to find the one thing everyone dreads has happened, our chunk of the company has been put up for sale.

Private equity companies will go to sovereign wealth funds (SWFs) for their investment money and not bother about banks, Guy Hands, boss of private equity firm Terra Firma, told the ‘Super Return’ conference in Munich last week.

The glitterati of the semiconductor industry have turned out to be right and the glitterati of the private equity industry have turned out to be wrong about the swoop on the semiconductor industry by the private equity industry back in 2006.

The mysterious private equity firm Carlyle Group which made a cool three hundred million quid on Qinetiq shares, and which has former PM Sir John Major as European chairman, is apparently trying to save its affiliate, Carlyle Capital, from bankruptcy.

Private equity companies are ‘staring into the jaws of hell’ according to US junk bond expert, Martin Fridson of FridsonVision, reported in the New York Times this week.

Rich Beyer starts today as CEO of Freescale Semiconductor and he seems to have kicked off on the right foot.

It’s Monday morning, and a laugh is in order, and a Swiss bank going bust is good for a laugh.

With the European semiconductor industry in the middle of a flurry of mergers and acquisitions, with more expected, it is worth looking at the history of these things.

 How cash-strapped is NXP? Apparently NXP gobbled $830 million of cash in the first six months of the year and the loss in its mobile telephony business may allow ST the chance to renegotiate the deal over ST-NXP Wireless which may reduce the $1.55 billion it originally agreed to pay to NXP.

The generally horrible mess that private equity buy-outs have made of semiconductor acquisitions e.g. KKR - NXP and  Blackstone - Freescale, could be matched by a 'success' with the planned IPO for KKR/SilverLake-owned chip company Avago Technologies formerly owned by Agilent.

Interesting to hear Frans van Houten, NXP's CEO, say that he remains  content with the private equity ownership of NXP, which was bought in 2006 by a consortium headed up by Wall Street buy-out company, Kohlberg Kravis and Roberts.

The experiences of the private equity industry in the semiconductor industry should have put them off any further investment in the chip industry, according to John Daane, CEO of Altera.

Proof, if further proof were needed, that private equity and the semiconductor industry shouldn't come within a million miles of each other, came this week with the news that NXP, owned since 2006 by a private equity consortium led by Wall Street firm Kohlberg Kravis and Roberts (KKR), has crashed out of the semiconductor top ten rankings for the first time in 45 years.

Private equity has had its successes in the semiconductor arena, according to Rich Beyer, Chairman and CEO of Freescale Semiconductor, which was acquired in 2006 by a number of private equity companies led by Blackstone.

Following the purchase of NXP in 2006 by a group of private equity companies led by Wall Street company Kohlberg Kravis and Roberts, some 3.7 billion of dollar-delineated debt and some 2.7 billion of Euro-delineated debt in the form of high-yield bonds secured on NXP's assets were sold. Paying the interest on these bonds is now costing NXP $450-500m a year.

It turns out that the most semiconductor-savvy guys in the past two years were the managements of Motorola and Philips who negotiated the huge valuations of $17.6 billion and $11.6 billion respectively for Freescale Semiconductor and NXP Semiconductors and sold them to private equity consortiums led by Blackstone and KKR at the top of the semiconductor cycle.   

Well relief all round. Ever since February the bit of the company I work for has been up for sale. The worst thing about it was the spectre of uncertainty. As the sale process continued it looked as if the worst turn-out was the most likely - that we'd be bought by a private equity firm.

Debts imposed by private equity funds on companies like Freescale and NXP could cause the next big financial crisis, with $500 billion of such debt needing to be rescheduled by 2010, according to the Bank of International Settlements.

When Philips sold NXP to KKR and a consortium of private equity companies, NXP was valued at $11.6 billion.

If you want a good laugh over the next few weeks just think of all those investors in private equity companies who will get a letter in the next few weeks telling them how much, or rather how little, their investments are worth.

It turns out there have been worse deals made by private equity companies than the disastrous takeover of NXP by KKR, Permira et al.

Proof, if further proof were need, of the evil effects which private equity ownership has on companies which get bought by private equity funds comes from as couple of US studies into private equity-owned companies.

According to the ratings agency Fitch, Freescale has more than $10 billion debt, but Freescale CEO Rich Beyer reckons it can be handled.

The vulgarly named Super Return conference, the jamboree of the private equity industry, held in Berlin last week saw some chastened presenters..

Challenged at the weekend by a reader to come up with a ten point plan for the recovery of NXP, here it is. The main problem is, of course, the $6 billion of debt loaded on the company by its private equity owners KKR, but it might be possible to find a way out of this debt burden, while establishing a strong trading position for the future.

When's a debt not a debt? When it's publicly traded bondholders' debt seems to be the answer to that one.

The mark-to-market accountancy rule imposed on financial institutions which says they have to value assets at the price they would get for them in today's market, is hammering the private equity companies and scaring off their investors.

The funniest remark of last week came from the unlikely source of a private equity magnate.

I suppose it's a jolly good thing if ratings agencies suggest you're going to default on your debt, because that depresses the market  value of your debt, and you can then buy it back at a very low price.

Creditors are hell. NXP and Freescale are beginning to find that out. Freescale has been sued by its creditors over its recent buy-out of debt, and NXP's bondholders are preparing to sue the company to have its debt-swap declared illegal.

It's almost a truism now that highly leveraged private equity buy-outs were a disastrous practice in the middle years of the decade. An S&P report out this week shows how damaging that practice has been.