Private Equity Expertise Is An Illusion.

No one will ever again believe a private equity guy when he says he has special skills in valuing corporate assets and managing companies.

KKR has seen to that with a series of gross miscalculations about the value of NXP since buying the company in 2006.

When it bought 80% of NXP in 2006, KKR paid €6.4 billion – then worth $8 billion – for the stake, putting a value of $10 billion on the whole of NXP. 

At today’s IPO price of $14 a share, NXP is valued at $3.49 billion.

Since KKR bought NXP, NXP’s employees have been reduced from 37,000 to 29,000.

At the beginning of last week KKR valued NXP shares at $18-21 apiece. That came down to $14 in a matter of days.

Since KKR bought NXP its trading losses have stacked up to a cumulative $5.5 billion.

Shortly after buying NXP, KKR loaded up the company with $6 billion of debt, of which $4.2 billion is outstanding.

According to Bloomberg, NXP’s debt is 7X NXP’s estimated 2010 EBITDA earnings. Yet NXP has to compete against companies like TI which have no debt..

When KKR first filed for an NXP IPO back in April, KKR said it aimed to raise $1.15 billion from the NXP IPO. This expectation was scaled back to $714 million at the beginning of last week, and to $476 million by the end of the week.

So when private equity companies tell you they have special expertise in valuing  corporate assets, and when they tell you they have better management expertise than industry-specific managers, there’s a one-word reply:

“Nuts.”

Tags: better management, expectation, illusion, private equity companies, stake

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12 Comments

  1. David Manners
    August 11, 2010 11:06

    Afraid I beg to differ there, FTM. Too many CEOs today feel they can cover up bad performance with financial smoke and mirrors. It can work for a while but not for long. At the end of the day a chip company lives or dies by its new product stream and defining the products and directing the R&D dollars are technical decisions. Without technical insight, a semi CEO is always going to be a disadvantage, because he has to rely on the technical insight of others. Which is why, IMHO, the IC industry is not yet ready to be handed over to the MBAs and the accountants.

  2. FTM
    August 11, 2010 09:52

    “According to Bloomberg, NXP’s debt is 7X NXP’s estimated 2010 EBITDA earnings. Yet NXP has to compete against companies like TI which have no debt”
    Well, they do have an expert to deal with this. The CE-Oh at NXP used to be the CFO at TI! You need to credit KKR with having brought the right guy to the top – because what NXP needs most (in it’s current predicament) is dollar magic – not silicon magic. Yes, there cannot be a lot of dollar magic without silicon magic, but if dollars got NXP into a mess, let’s give dollars a chance to get them out of it. (Yeah, the cider seems to have made me more optimistic than I usually am!)

  3. David Manners
    August 10, 2010 19:43

    I’m sure you’re right about the commission, Mike, I was referring to the application of the money raised

  4. Mike Bryant
    August 10, 2010 18:52

    Well you may be right
    ….. but somehow my cynical nature makes me think KKR will find a way of charging their usual 2% commission on the deal.

  5. David Manners
    August 10, 2010 13:45

    Funnily enough Mike I think you were once right, but no longer are. When KKR first mooted this IPO back in April, they said they would apply the proceeds to relief of their long-suffering invesators. However, last week, after the IPO, they were saying the money would go to paying down NXP debt. It may well be that one of the conditions for getting the deal done at $14 was that the money should be applied to paying down NXP’s debt, becausee the massive level of debt loaded onto NXP by KKR in 2006, was one of the main, if not the main, reason for potential investors being so wary of the NXP IPO that they pushed the offer price down from $18-21 to $14.

  6. Mike Bryant
    August 09, 2010 18:55

    Stoorirfit has it to a T. KKR will still get a commission on this sale and it’s the investor who will lose out yet again. I thus suspect it was KKR’s own cashflow problems that have driven this sale, not any demand from the investors for cash.

  7. George
    August 09, 2010 15:35

    Robotronic,
    I, too, was thinking that David’s response was far too polite!

  8. August 09, 2010 13:43

    There is also a two word answer but it’s probably best to stick to the more polite one word of yours David.

  9. Stooriefit
    August 09, 2010 13:14

    This has the look of a pension fund advisor who, at the bottom of the crash, advised the sale of shares and purchase of bonds.
    Fortunately the trustees laughed him out of the room.
    We are bound to get this sort of shenanigans when advisors are paid a proportion of trades, rather than a proportion of profits.

  10. David Manners
    August 09, 2010 09:37

    I wish I knew, the baron, they’re a pestilence.

  11. The baron
    August 09, 2010 09:21

    “No one will ever again believe a private equity guy when he says he has special skills in valuing corporate assets and managing companies.”
    If only that were true, David, but we all know deep down that the city believes its own hype about what a bunch of rocket-scientest Masters of The Universe they all are and it won’t be too long before the Pin-Stripe Army of London will be lapping-up whatever bullshit the PE crowd feed them and start gambling/top-skimming our pensions on it again.
    How can we get shot of these deluded numtpies and their meddlesome influence wherever they blunder into once and for all?
    The Baron

  12. Dave
    August 09, 2010 08:44

    What’s interesting is to ask why they are IPOing now. Leverage has the effect of amplifying both gains and losses. So you could argue that the owners were unlucky to leverage up the company just before the biggest market disaster in 75 years, which amplified their losses enormously. You would also then expect that during the recovery, the high leverage would serve to amplify any gains, so the owners would reap the benefits by staying heavily in debt, and perhaps even get back to break even. In this case the owners would be foolish to dilute their ownership and reduce the leverage at the start of a recovery. But in fact they are doing just this. So the big question – do the owners think that NXP is right now performing as well as it ever will, or alternatively that we are already at a market peak again?

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