mannerisms

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

Is Blackstone More Responsible Than KKR?

Of the two big private equity semiconductor buy-outs – NXP by KKR and Freescale by Blackstone – Blackstone looks the more responsible owner.

 

NXP’s decision last week to look for a buyer of a majority stake in the digital side of its Home Business Unit, looks like the classic private equity strategy of buying companies then flogging them off in bits.

 

The process destroys the company, but makes good profits, in good times, for the private equity funds. In bad times, with a bad investment, it helps reduce the losses.  

 

By contrast, Blackstone seems to have accepted that the best way to recover from the cock-up of  paying too much for Freescale, then loading it with too much debt, is to try and manage it for the long-term. To do that they appointed a CEO with a semiconductor track record as a product strategist and a long-term grower of  businesses.

 

KKR seems to have been less responsible. It appointed a CEO with a financial background with a track record in M&A. His predecessor, Frans van Houten, negotiated a superb deal for NXP in divesting the wireless business. It remains to be seen whether a good deal, or any deal, can be arranged for the Home Business Unit.

 

Meanwhile NXP is now saying it’s re-focussing on becoming a ‘high performance analogue’ company. It is already a top five analogue player with 6% market share.

 

Expanding the analogue business was a  good strategy for TI when, in 2000 and 2001, it spent nearly $9 billion buying Burr-Brown and Unitrode which propelled TI to its current 14% analogue market share and its $5 billion of annual analogue revenues. .

 

And going analogue was a good strategy for Intersil back in 2002, when Intersil was re-positioned by Freescale’s current CEO, Rich Beyer, from being the No.1 WiFi player to becoming a high performance analogue company, buying Elantec, BitBlitz and Xicor in the process. Intersil had around $1.7 billion in cash gained from an IPO and a couple of big disposals to smooth the transformation. 

 

But is this still a good strategy some seven to eight years after TI and Intersil effected their transformations?

 

And does NXP have access to the money required to make the necessary acquisitions?

Tags: blackstone, business unit, market share, private equity funds, strategist

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4 Comments

  1. David Manners
    August 06, 2009 11:31

    Cheese: My answers to your 3 questions are:
    1. Not if you’re a semiconductor business where new products are the drivers of growth and profit.
    2. Not in the semiconductor business where nearly all mergers have ended in reduced shareholder value (with ST a mega-exception).
    3. Not ‘always worse’ but usually worse. 1 + 1 in semis doesn’t equal 2, Cultures clash. Product approaches differ. Scott McGregor, who’s done many M&As at Broadcom says half of all M&A activity destroys shareholder value.
    Surely well-focussed R&D, clever product definition, speedy product development, manufacturing and marketing outweigh M&A activity. The MBAs in the private equity companies understand M&A, they don’t understand how to bring an IC to market, nor would they claim to. All they want is money and that requires patience with the product development teams and with the cycle. Patient money is not the hallmark of PE guys. They want quick returns. By saddling NXP with $6 billion of debt, requiring $480 million a year in interest payments, they hobbled the ability of NXP to spend money on creating new products.

  2. Cheese
    August 06, 2009 04:45

    David, your article triggers a few questions. Firstly, should a business get defensive when confronted with the need to deliver profits? Is M&A driven consolidation always bad for the involved companies? Is staying as a “Noah’s ark” in terms of diversity of businesses involved always worse than bringing like-minded businesses together to generate focus?
    Private equity investors are business-men. While they will not suffer historical sympathies, they force the business units to deliver. If the best way to do that is via M&A exercises, then so be it. I wouldn’t fault KKR on their proposal to hive off the Home unit.
    On the other hand, M&As are fraught with severe risks. For example, the marriage of ST and Genesis has not yielded results so far.
    KKR is probably right in hiving off the Home BU, but they must make sure that the new entity is not born crippled – either due to overlapping portfolios amongst the members of the new entity, or due to huge ideological differences between the members.

  3. David Manners
    August 04, 2009 13:24

    Michael, I think saying you’re going to become a ‘high performance analogue’ company is a glib way of saying you’re going to try and sell everything except analogue off. After all, asset-stripping, breaking up companies, avoiding tax and over-loading acquisitions with debt contstitute the core competence of private equity companies. van Houten was ousted, I think, becasue he genuinely wanted to grow the company. That’s certainly what he was saying after KKR bought it. After he’d gone, I think KKR reverted to type and looked for a way to get out of the situation as quickly as possible while losing as little as possible. The truly appalling thing is that these private equity companies get tax breaks – as though they are charities doing good for the community.

  4. Michael
    August 04, 2009 03:32

    I agree with you David. Honestly speaking, talk is cheap, I will only believe when I see the result of high performance analogue company. When I look at the bright side, can’t this also be a good deal if NXP sells its Digital Home? The R&D investment in this market is huge but the market size is not impressive, to diverse this business unit and to have a pure fabless company can create a stronger leader in the market. What’s your view?