mannerisms

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

Private Equity Ruins NXP

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

 

At the end of Q3 08 Philips valued its 20 per cent stake in NXP at 555m euros which is equivalent to $713 million and which values the entire company at 2.77 billion euros which is equivalent to $3.56 billion.

 

KKR imposed debt on NXP which currently amounts to $6 billion.

 

At the end of Q308 NXP had cash of $1.5 billion and, in Q4, it drew down a $400 million borrowing facility making $1.9 billion in total cash.

 

So NXP has debts of $6 billion, and total cash of $1.9 billion, which equals net debt of about $4 billion secured on a company valued at $3.56 billion.

 

Next year NXP has to start re-paying the $6 billion or face what could be a very tough environment for re-negotiating the debt.

 

Who runs their affairs in this crazy way? Only, it seems, a bunch of Wall Street-ers in their 20s with great theoretical financial skills, but zero practical skill at running a business.

 

On the bio of the new NXP CEO, Richard Clemmer, it makes some play of the fact that Clemmer took an ailing Agere and turned it into a worthy partner for a ‘merger of equals’ with LSI Logic.

 

That might give some clue as to KKR’s motivation for replacing Frans van Houten with Clemmer. One way out for NXP is a merger with another semiconductor company. Merging with ST or Broadcom would be a very satisfactory result for the long-suffering employees of NXP.

 

Another way out might be if Philips, which sold 80 per cent of NXP at a total company valuation of $11.6 billion, therefore presumably netting north of $9 billion, decided it might be worth buying  the 80 per cent back on a total company valuation of $2.8 billion i.e. for a purchase price of just over $2 billion.

 

A third way out might be what the financial people call a ‘pre-pack’ insolvency where the owners draw up plan for breaking up the company and then put the company into insolvency.

 

Then the owners aften buy back the profit-making bits at a low price, while the loss-making bits, plus the debts, are left for the bankruptcy adminsistrators to handle.

 

In NXP’s case this would leave the bondholders with $4.5bn of worthless bonds secured on loss-making assets. And who are these bondholders? Very often the same financial institutions our governments have been using our money to bail out. So, effectively, the tax-payers get screwed – again.  

Whatever happens to NXP, the Wall Steeet Wallys have crippled a great company.

 

As, Malcolm Penn, CEO of Europe’s leading semiconductor analysts, Future Horizons says: “You’d be better off selling your soul to the Mafia,” than selling a chip company to private equity.

 

May God preserve us all from Private Equity in 2009.

Tags: Agere, crazy way, richard clemmer, satisfactory result, worthy partner

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11 Comments

  1. David Manners
    January 08, 2009 11:09

    I agree the crafty old Philips management saw the Wall Street guys coming and suckered them into paying an enormous price for NXP – and it is that inflated price tag, and the $6 billion of debt which the Wall St people put on NXP, which is crippling NXP.
    Private equity may not have ruined the company but it’s having a damn good try.
    But, you never know, for individuals and individual BUs there can be opportunity in these cock-ups by the bosses. Your BU may end up in the hands of someone who knows how to run it.

  2. NY NXPer
    January 08, 2009 04:42

    Like B. Clinton said “Its the economy stupid!” Private equity didn’t ruin anything. Philips is very good at forecasting, so when I saw them getting out of semi’s I knew that the glory days were over.
    Its looking more and more like I will be job hunting before the year is out :(

  3. David Manners
    January 07, 2009 23:28

    Good Luck Anonymous,
    Hope the new job goes well.
    Maybe the semiconductor industry will tempt you back you back some day. As you say, it’s crazy, but many people find it addictive.
    Very best wishes,
    David

  4. anonymous
    January 07, 2009 22:00

    Thanks for the insightful, if somewhat depressing, blog on NXP. I am an NXP employee, an architect in the troubled business unit Home, and it’s interesting to see some outside perspective on our situation.
    You might think that as an employee I have a lot of inside knowledge on the workings of KKR and co, but in fact they rarely figure in my daily work. They are referred to as “the sponsors”, but are, at my level, rarely seen taking direct actions. The term “sponsor” is actually quite strange. I’d say only bondholders have some moral basis to call themselves sponsors of NXP, although at this point these good people probably refer to themselves as suckers instead.
    I’m sorry to see Frans van Houten go, as he always struck me as a competent and honest leader, and I enjoyed the few chances I had to meet him. I guess he was just given an impossible mission.
    It’s really too bad for the semiconductors and techonlogy industry in the Netherlands and Europe to see NXP stumble and maybe ultimately fail. It won’t directly affect me anymore, since I have given notice a few weeks ago (before Frans copied my actions :-). I saw a good opportunity in the rapidly deteriorating Dutch employment market and decided to take it. The economy going the way it goes, the alternative would have been to stick with NXP until the end of the recession or the end of NXP, whichever occurs first.
    I will be leaving the semiconductors business, with some regret, but also wondering: what kind of crazy industry is this? Thanks for cheering me up a bunch :-)

  5. David Manners
    January 06, 2009 23:05

    Nice point Paul. Will Strauss, as usual, gets it absolutely, and picturesquely, right. If the summit of Clemmer’s achievement is to get Agere, the heir of AT&T Microelectronics, to the point where it can form a ‘merger of equals’ with a fast-failing LSI Logic, then the omens for NXP are pretty awful.

  6. paulh
    January 06, 2009 21:37

    Regarding your comment about Agere, I treasure the comment by Will Strauss, the guy who runs the Forward Concepts market research agency, who when asked what he thought about Agere merging with LSI responded that “it’s like two little old ladies, trying to help each other across the street”.
    If the summit of NXP’s ambition is to cross the street like a little old lady, then this seems a rather expensive way to achieve it…

  7. David Manners
    January 06, 2009 14:32

    Thanks Corrector. I’m not an accountant and, in my simple way I assumed that if a fifth is worth $700m, then the whole is worth 5X that i.e. $3.5bn.
    But, as I say, I’m not an accountant and have always been amazed at what accountants can do with figures.

  8. Corrector
    January 06, 2009 14:28

    Umm… you’re math on valuation is unfortunately very much off. If phillips values its “equity” stake in NXP at $700 million then phillips is assuming a total enterprise value of $9.5 billion.
    The Company does not have to repay its debt next year.
    I appreciate your blog but this post is off the mark (but the general theme is right, KKR is messing up)

  9. David Manners
    January 06, 2009 10:56

    Crikey. $6bn makes the situation even worse. Yes you are right, the debt remains $6bn and my $4.5bn figure was less the $1.5bn from ST.
    The stupditiy of the Wall Street-ers in imposing a $6bn debt on NXP is beyond all belief

  10. Fresher
    January 06, 2009 09:23

    Regarding the level of the debts of NXP:
    > You mention $4.5bn with a total cash of $1.9bn,
    including a short term debt (revolving credit facility)
    > But from latest available financial figures
    (http://www.nxp.com/investor/reports/3q2008/), it
    seems to me that NXP has a debt of $6.0bn.
    Now if you substract the total cash you get back to
    $4.5bn that you mention (see page 26 of the report)
    This includes the money paid by ST for the wireless
    activity as mentioned page 1.
    Between end Q3-08 and now, there was no major
    change except that revolving credit facility was
    used (again), which implies higher cash (from
    $1.5bn to $1.9bn) but higher debt as well.
    Anyway, $1bn more or less, does it really matter nowadays ?

  11. January 05, 2009 20:55

    L-Mar Associates is one of the larger Rep Firms in Upstate NY market. We represented PA Semi which was purchased by Apple in April of 2008 and Kenet that was purchased by Intersil in September of 2008.
    To date we have not received any of the commissions that PA Semi/Apple or Kenet/Intersil owe us. This is inspite of numerous phone calls and e-mail.The dollars are not significant enough to warrent our time and money to pursue a legal recourse.
    Apple and Intersil take the approach of “To hell with what we owe the Reps”
    Being anywhere near Private Equity Firms, VC’s or buyouts like listed above are an invitation for disaster!