mannerisms

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

Private Equity Hottentots

Watching the private equity companies trying to run semiconductor companies is like watching a Hottentot trying to get a screw out of a bit of wood.

He pulls, he pushes, he bashes it from side to side, he applies more and more levers, but still the screw doesn’t come out.

He’s not to know that it turns.

So with KKR and Blackstone who acquired NXP and Freescale respectively, back in 2006.

Here we are, six years later, and the companies’ sales haven’t risen in all that time, their profits haven’t risen (in Freescale’s case there haven’t been any profits) and the companies’ market cap is still miles away from the valuations put on them when KKR and Blackstone bought them.

Freescale’s market cap is about $2.4 billion compared to the $17.6 billion valuation at the time of the takeover; NXP’s market cap is about $5.8 billion compared to the $10 billion valuation  put on it at the takeover.

After six years! And the semi market hasn’t stood still those six years.

So the private equity Hottentots sweat away with their levers (and how they leverage!) and they bash the screw from side to side, and they pull it from the top and push it from the bottom, and they scratch their heads but they still don’t get it.

Tags: hottentot, leverage, levers, profits, takeover

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22 Comments

  1. David Manners
    August 14, 2012 12:02

    I suppose some people can rest easy when they’ve screwed so many people [Anonymous] but they’d have to be hard, unpleasant or deluded.

  2. Anonymous
    August 14, 2012 11:29

    Mayer made around $60 M and has not been seen since. Last CEO made a significant sum and the current CEO will probably leave with a large sum of cash when the VCs realise their expectations are just not grounded in reality.

  3. David Manners
    August 13, 2012 11:05

    Interesting, Stooriefit, I see the 2006 Companies Act (sections 170-7) about the ‘proper purposes’ directors are obliged to follow do not include ‘plundering the company’s assets for personal enrichment’ which could be a bit painful for some people we know. And that there’s also a duty of reasonable ‘care skill and competence’ which can be breached by negligent conduct. Also I see ever since the 1719 South Sea Bubble, directors must avoid undisclosed conflicts of interest. Also they must avoid taking ‘3rd party benefits’ Wow think of all those Olympics seats doled out to customers! They must also avoid self-dealing and then comes, as you say, this nebulous duty to ‘promote the success of the company’ which does include a nod to ‘long-term consequences’. As you say, there’s a legal framework imposing duties on directors but it’s probably too wishy-washy in application to worry the likes of Ed.

  4. Mike Bryant
    August 13, 2012 10:15

    Even if it was well written, the problem is most multi-nationals aren’t able to comply with the legislation in all companies and so it’s a case of choosing what the largest gorilla – usually the US – tells you to do and hope for the best with the rest.

  5. Stooriefit
    August 13, 2012 08:51

    You made me look – it is interesting, that potentially the most useful and constructive provision in the UK companies act for the long term health of businesses is also the most nebulous.
    http://en.wikipedia.org/wiki/Directors%27_duties_in_the_United_Kingdom#Duty_to_promote_company_success
    Nice aspiration, but a whole forest of fig-leaves to cover directorial arses when they are caught with snouts in troughs.
    No wonder Ed is confident of getting away with it…

  6. Freescaler
    August 10, 2012 14:34

    Directors are people too! Well some of them. Those passing through the revolving door of CEO Freescale did pretty well out of the deal. From the inside it looks like the the company is run for the benefit of them rather than the other way round. Also assuming that companies’ only responsibility is shareholders is to miss the point. Companies need society to buy their stuff. Not everything of value is listed on the stock market. If I break your leg, GDP rises. Are you sure dollars is the ultimate measure of everything?

  7. David Manners
    August 10, 2012 12:30

    P.S. papa smurf, I understand KKR like ridiculing bankers. Apparently after one KKR takeover KKR threw a party for all the bankers involved and held a mock awards ceremony. One award was for ‘the banker who understood least about the transaction.’ And the guy walked up and accepted it!

  8. David Manners
    August 10, 2012 11:27

    Yes papa smurf I assumed KKR are doing OK for themselves but the net result is that NXP have this huge debt which must be a massive drag on the company’s growth. To hobble a company in this way seems Hottentot-ish to me.

  9. papa smurf
    August 10, 2012 11:06

    Hard to believe, isn’t it? it took us (inside NXP) a while to understand all this… but that was too late. Trust me, KKR and Philips didn’t loose any money here…

  10. David Manners
    August 10, 2012 10:58

    Wow! Papa smurf, now we know why the western world’s got so much debt! Hanging bankers is too good for them.

  11. Papa smurf
    August 10, 2012 10:49

    Hi David
    It seems they actually are:
    “The transaction will put the enterprise value for Philips’ Semiconductors business at approximately EUR 8.3 billion – consisting of EUR 3.4 billion purchasing price, EUR 4.0 billion for debt and other liabilities, and EUR 0.9 billion for Philips’ remaining stake.”
    http://www.newscenter.philips.com/main/standard/about/news/press/archive/2006/article-15486.wpd

  12. David Manners
    August 10, 2012 09:52

    How come KKR loaded $6bn of debt on to KKR if it had only paid $4bn for 80% of NXP, papa smurf? I know bankers are stupid, but surely not as stupid as that.

  13. David Manners
    August 10, 2012 09:45

    He kept us out of the Euro Mike, for that he deserves a statue

  14. papa smurf
    August 10, 2012 09:37

    David
    I think you made the mistake several times: you are confusing market cap and valuation. For instance NXP was worth 10 billions when Philips sold it, but as soon as KKR & Co loaded 6 billions debt on it, the company theoritical market cap was only 4 billions, and that’s the price KKr&co paid for it.

  15. Mike Bryant
    August 10, 2012 09:33

    We tried that in 1997 David – and the first thing Brown did was destroy our pensions.
    He should be prosecuted along with the bankers !!

  16. David Manners
    August 10, 2012 06:48

    As I remember it, X, Freescale was sold to Blackstone et al and only after that came the sale of bonds to defray some of the cost of the purchase. I don’t know if Mayer pitched to the bondholders. He certainly pitched to the PE people. The bondholders were screwed later when the full awfulness of the deal was appreciated, the value of bonds dropped and they were redeemed at low valuations. That happened post-Mayer. The bondholders sued to try and prevent the below-par redemptions. Interesting what you say about your company. It shows that if you run a company by financial metrics you depress the hell out of people – like Arnie with GEC – and you don’t get good performance out of depressed people. I think the good old French have shown us the way – elect a socialist!

  17. X
    August 10, 2012 03:28

    That’s an interesting point. Did Michel Mayer (Freescale CEO at the time) have any responsibility towards the bond holders whose debt became Freescale’s responsibility on completion of the sale to Blackstone? Michel did the sales pitch to the bankers. And the original bond holders lost out massively and are presumably rightly pissed with him. Does he have any responsibility for that?
    As for employees: eventually the pendulum will swing back and employers will realise that they are actually an asset and not just a cost. I work for a PE owned company which has not treated its employees well and, in return, the employees tend to do their contracted hours and no more. Productivity is sub-optimal to say the least.

  18. Mike Bryant
    August 10, 2012 00:04

    Well to be exact it depends on the legal juristiction.
    Obviously obeying the law comes first wherever you are but after that in the US the duty to the shareholders is paramount, whereas UK and some other countries mention ‘other stakeholders’ being ‘taken into account’, usually without actually defining either of these terms.
    When I joined HP in the 70s (when it was a well run company) the company initiation specifically emphasised this point, but also made sure everyone had the opportunity to be a shareholder through the employee share purchase scheme.
    Later on when the Sarbanes-Oxley act was passed it did change some elements of US corporate law but not this one.
    In Philips’ case if you list on a US stock exchange then US law specifically says you are agreeing to the US version. Philips has been of its own choosing listed on the NYSE since well before the NXP selloff.
    Now in normal affairs one can argue that taking care of customers or employees adds to shareholder value and so is justified, but when someone comes along with an offer three times the actual worth of your asset you cannot legally ignore it through what are known as the ‘Revlon Duties’ of all the company directors.
    So despite being in the Netherlands, if the Philips board had chosen to take a different course every US shareholder would have sued them for every penny they had.

  19. David Manners
    August 09, 2012 20:46

    Are you sure a company owes no duty of care to its customers and employees, Mike?

  20. Mike Bryant
    August 09, 2012 20:33

    I suspect if they hadn’t sold to the highest bidder the Philips board would have been sued or even prosecuted and disqualified from running a company. One may not like it but in a capitalist system a company’s sole duty is to its shareholders.

  21. David Manners
    August 09, 2012 18:22

    That’s a very interesting question, cheese, what else could Philips have done apart from selling NXP to KKR & Co? One answer is that they could have been more scrupulous in their choice of purchaser. Selling it to another semi company would probably have been better for NXP and its people. Another option would have been an EC-managed merger with ST and/or Infineon. However, seeing how ST-E worked out, that would probably have been a disaster. I must say I was quite shocked to hear Philips had sold it to a PE company. It seemed an irresponsible thing to do – although immensely profitable for Philips of course.

  22. August 09, 2012 12:37

    Haha, for a change, the PE guys are struggling to screw :-)
    On a more serious note, wonder what the Eu owners would have accomplished if they had decided not to sell over to the clueless PEs. Was the bloodbath avoidable? Or weren’t the EU owners smart to encash a rich legacy and forgo a poor future?