mannerisms

Ruminations on the electronics industry from David Manners, Senior Components Editor on Electronics Weekly.

Alas Poor Infineon

After the appalling mess Blackstone and KKR have made of their acquisitions Freescale and NXP, it beggars belief that another semiconductor company can be welcoming the advances of a private equity company.

 

But here’s Infineon getting into a tortuous deal with the American private equity company Apollo.

 

The tortuous deal could lead to Apollo getting 29 per cent of Infineon on the cheap.

 

The wheeze is that Infineon offers a rights issue and, if any of the shares on offer aren’t taken up, Apollo gets them up for €2.15 apiece.

 

If Apollo gets them all at €2.15, it will have picked up 29% of Infineon for $700m

 

For all I know, Apollo has already got a stack of Infineon shares because they were as cheap as 38 Eurocents in March and have shot up to over  €2.60 in the last three months. Someone’s been buying.

 

If, through its underwriting of the rights issue, and its possible existing share-holdings, Apollo ends up with 30% of Infineon’s shares, it is obliged by German law to make a bid for the whole company.

 

If it can get away with the €2.15 price tag for all the shares, Apollo will have bought Infineon for around €2 billion, compared to the $11 billion valuation put on NXP by KKR, and the $17.6 billion valuation put on Freescale by Blackstone.

 

And then what will happen? Well that’s a no-brainer. Infineon will either be asset-stripped, or loaded up with huge debts, or very likely both.

 

For all those great engineers and dedicated souls who have made Infineon into a great engineering company, this is a terrible prospect.

 

For top management it will, very likely, be a lucrative bonanza.

Tags: bonanza, freescale, great engineers, infineon, Private equity, wheeze

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14 Comments

  1. David Manners
    July 22, 2009 10:42

    We’ll try, Adrian

  2. Adrian
    July 22, 2009 10:40

    Fascinating line of discussion. Just want to add my gratitude, and hope you guys keep the discussion going!

  3. David Manners
    July 21, 2009 08:20

    Robert, i will have to ask about this because I don’t know. My assumptions are: 1. These companies are heavily Euro-centric and European engineers tend to hang onto their jobs. 2. The PE involvement started just as the recession hit so there were a steadily diminishing number of jobs to go to. 3. In Continental Europe there’s a dearth of venture capital for backing design teams embarking on a fabless start-up. 4. In Europe there is usually a good redundancy package to be had if you hang on and wait for the sack. But, as I say, i don’t really know, so I’ll ask around a bit, cheers, David

  4. robert
    July 21, 2009 03:52

    David,
    Regarding the future of NXP, IFX, FSL etc there is one thing that I do not understand where maybe you can help.
    Problem: The parent companies are now loaded with debt and therefore at high risk of failure. The basic problem is that the debt holders will have first access to any future profit that materializes and whatever they do not claim will flow onto the private equity companies. The grunt engineers are ****ed whichever way you slice it.
    Now if my assessment is even close to being correct, it raises two questions.
    Why are any good engineers remaining at these companies?
    Do they feel a moral responsibility to reward the monumental stupidity of PE firms and incompetent upper management?
    Since it is clear that all the above named companies are all perusing a “fab Lite” strategy, it stands to reason that a “fabless” structure is no longer an impediment to business. Under these circumstances, isn’t it logical that the best Engineers would leave?
    What I’m suggesting is also not without precedence, it is almost the status quo for the IC industry.
    My problem is: Why aren’t we seeing this happen?
    Why aren’t the design managers bailing and taking complete product lines and design teams with them?
    It seems improbable that all engineers have lost their b***s, so it is a real quandary for me.
    All help understanding this dilemma is most appreciated.
    Regards
    Robert

  5. David Manners
    July 17, 2009 09:41

    Thanks Dave, then maybe the pesky blighters are actually going to do some good this time. We’ll see. But I’d be happier if I knew how many Infineon shares Apollo currently holds.

  6. Dave
    July 17, 2009 09:26

    My guess is they needed someone to guarantee to buy a minimum amount of shares …… otherwise each existing shareholder would have run the risk of buying shares at EUR 2.15 of a company which would then go bust anyway (if no-one else bought in). So ironically, having Apollo back up the sale will probably mean existing shareholders will feel comfortable enough to buy the new shares, and Apollo may not get many at all.

  7. David Manners
    July 17, 2009 08:58

    Dave, I agree. So far it looks good. But if it’s all so good what is Apollo doing skulking around like this? In my book, the PE guys are invariably up to no good unless and until they can prove otherwise. P.S. With Infineon shares at €3 when they were at 36 Eurocents three months back, some people have already done very well out of Infineon’s recovery.

  8. Dave
    July 17, 2009 08:37

    Actually the existing share holders get first dibs on the new shares. Its only if they dont take them up that Apollo gets a look in. And with the price now over EUR 3, who wouldnt buy them for EUR 2.15? Looks like Infineon have made the best of a bad situation. As Ryan said, what was the alternative? Just go bust? Pretty impressive effort in this sort of climate.

  9. David Manners
    July 16, 2009 17:27

    Well I beg to differ, Ryan, Infineon’s unaudited preliminary figures show a ‘segment profit’ (whatever that may mean) of € 8 million in calendar Q2 on sales of €845 million – 13% up on Q1, while the auto business lost €17 million on sales of €206 million, the industrial and multimarket segment made a profit of €9 million on sales of €228 million, the chipcard and security segment made a profit of €4 million on sales of €82 million, and the wireless business made a profit of €19 million on sales of €251 million. Even the flogged-off wireline buiness made a profit of €7 million on sales of €84 million. Not too shabby when achieved during the industry’s worst recession for 25 years.

  10. Ryan
    July 16, 2009 17:11

    They didn’t have any choice. Infineon may be a great engineering company but they have been losing money since 2001. You can’t lose money for 8 years and not get into trouble. Infineon were heading for bankruptcy in 2010 when their bonds became due so they needed someone to inject some cash. It was a no brainer. Either sell out this year or go bust next year. Actually Infineon have given themselves the best chance of survival as an independent company but I don’t think it will be enough. Quarterly report somes out on July 27th so you can check the situation for yourself.

  11. David Manners
    July 15, 2009 08:38

    Robert, you could be absolutely right, After all, the demise of Ferranti Semis, Plessey Semis, STC Semis, and Marconi Electronic Devices was the precursor to a rise of the semiconductor start-up scene in the UK. Private equity ownership could kill off the big European IC companies, paving the way for a wave of IC start-ups experiencing as you say ‘insane growth’. Wouldn’t that be brilliant?

  12. robert
    July 15, 2009 02:30

    David, I’m also afraid this will be the last nail in the European IC industries coffin. Unfortunately it’s over….
    Now for the good news, all these companies make products, they all have real customers, its not about obscure worthless CDO’s CDS’s that some bank stores in a vault. They all produce widgets, for which there is real demand. All the losses at NXP, FSX, IFX and (we might as well include ST) are gains at other companies.
    My advice is to follow the money, who is winning, who will continue to win, what revenue will the winners have in 3 years. The winners will enjoy insane growth, which no doubt will result in wealth and the funding of lots of new IC start-ups. So as long as I’m in the industry I say bring it on….
    Robert

  13. David Manners
    July 14, 2009 13:31

    Spot on, Brian

  14. Brian Pollard
    July 14, 2009 11:38

    The logical outcome of this process is that one by one, all European companies will be picked off, loaded up with debt to line the pockets of the Vulture Capitalists, resulting in the victim company getting tax rebates instead of paying tax.
    When 90 per-cent of all companies have been so dealt with, politicians will finally realise what is going on as the corporate tax take fades away into the sunset.

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