The Destructiveness Of Private Equity

The scale of the destruction wreaked on NXP by its private equity owner KKR was further revealed in NXP’s Q2 results.

 

NXP’s  Q2 statement says that the purchase price paid for 80.1% of NXP was $10.601 million. At last week’s IPO of NXP the market put a value of $3.490 million on the whole company, so valuing the 80% stake at $2.790 million..

 

NXP’s Q2 statement says that NXP’s debt, at the beginning of 2010, was $5.283 million and that was reduced by $1.331 million in 2009. So the debt at the beginning of 2009 was $6.614 million. That was loaded onto NXP by KKR to off-set its purchase cost.

 

In the NXP Q2 statement it says: ‘Our wafer factory in Caen, France was sold in June 2009, and our production facility in Fishkill, New York was closed in July 2009, and in January 2010 we closed parts of our front-end manufacturing facility in Hamburg, Germany. We have also initiated process and product transfer programs from our ICN5 and ICN6 facilities in Nijmegen, the Netherlands, which are scheduled to close in 2010 and 2011, respectively.’

Since KKR bought NXP its cumulative trading losses have been $5.5 billion.

Since KKR bought NXP R&D expenses as a proportion of revenues have declined from 19.6% to 11.4%.

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

When Philips Semiconductors was spun off from Philips it was re-named NXP, standing for Next eXPperience.

Although most of the chip industry feared the worst when KKR bought NXP in 2006, no one was expected that the next experience would be destruction on such a devastating scale.

Tags: destructiveness, icn6, netherlands, q2 results, stake

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21 Comments

  1. john cobb
    October 29, 2010 04:18

    nxp has 60% interest in Trident. What is going to happen to Trident? Are they planning on selling their shares to someone else. Any ideas would be appreciated.

  2. David Manners
    September 02, 2010 09:36

    It’s a shameful story, Tom, and I’m ashamed to say it is presided over by an English guy, Peter Bonfield, the chairman of NXP, who made a hash of running BT. Such people, just doing the will of their PE masters, while creating misery for thousands of people and their families, are a disgrace. As you say, it’s an incitement to socialism. The EC has now seen how awful PE is and are legislating to control it.

  3. Tom
    September 02, 2010 09:07

    As an former employee of NXP at Hamburg, I can add the following:
    Belief in the future/ identification with the company/ motivation to work hard for a sound
    future etc. went down in such a great extent that the productivity in processes/ products was almost gone in the years from 2008/2009 onwards.
    Moreover really good “brains” already left this
    company. What is left behind is a disorientated/ absolutely demotivated staff that is waiting to get the day “around”.
    The commentaries on “filipsworld” show the drama in a real dramatic way !!
    I have , so far, never seen such d r a m a t i c go down of a once well renowned location.
    All this is, at least indirectly, also reflected in the figures.
    What a shame that now the public has to bear the costs (w.r.t. people still unemployed).
    In a more abstract sense it puts great damage
    also to our political system:
    When you see that owners of KKR, bain capital etc. earns h u n d r e d s of millions per year, but employees are getting unemployed, the rest to fear for their job every day, it is no wonder that more and more people are tending extremely “left”-wing politically.
    SHAME ON NXP AND ITS OWNERS, PLUS THEIR LOCAL “MANAGERS” (nothing to decide, just receiving orders from above)TO MAKE SUCH A MESS OUT OF THIS COMPANY/ LOCATION !!!!

  4. Mike Bryant
    August 31, 2010 12:08

    @ Nameless : If your ambition exceeds your need for security then go for it. The job might not be there in 3 years but as you say it’s a significant promotion and a dream job so the experience will open up further opportunities later on when/if you need them.
    On this point, one thing that has surprised me is the low number of potential startups I have seen from ex-NXP staff. This was a skilled workforce and I would have expected more. Startups do not have to imply a 45nm chip costing $30m or more to develop and we have assisted several in the $1 to $3m range over the last few years.

  5. David Manners
    August 31, 2010 09:50

    Well, Nameless, I think the problem is that NXP’s owners, KKR, are not going to invest money in NXP while they continue to own it. In fact KKR want to suck money out of NXP. KKR know they got suckered into over-paying for NXP so they’re not going to be benevolent owners. They may sell off other bits. There may be some kind of merger with the rump of Infineon. Every way you look at it it seems like turmoil, lack of investment, and money taken out to pay off the enormous debt loaded onto the company by KKR. However, since the IPO, there’s a chink of light for NXP in that KKR’s grip on the company may not be forever. And that, Nameless, is about as hopeful as I can be. Good luck.

  6. Ex-NXP'er
    August 26, 2010 12:12

    http://www.bloomberg.com/news/2010-08-25/private-equity-losing-commitments-from-pensions-as-tony-james-woos-oregon.html
    “Firms that were able to sell holdings had to cut the price or sell below cost. KKR and Boston-based Bain Capital LLC this month raised $476 million in an initial public offering of NXP Semiconductors NV after reducing the price to $14 a share from as much as $21. They bought the Dutch chipmaker in 2006 in a deal valuing the company at about $9.4 billion including debt. NXP has reported combined losses of $5.5 billion since then, and its current market value is $2.7 billion. KKR said this month that its stake in NXP was worth 50 cents on the dollar.”

  7. David Manners
    August 24, 2010 11:00

    FTM, Stooriefit, Ian and Mike – the lost comments are now restored. Thanks for pointing the problem out. Many apologies for this lapse.

  8. David Manners
    August 24, 2010 08:37

    I am mortified by this problem, Ian, and I hope to get some sort of explanation today when the IS people come in. Meanwhile I deny the scurrilous charge that I have sold out to PE.

  9. Ian
    August 24, 2010 06:27

    I think the problem with disappearing comments is that David has decided in the face of increasing demand on the web to sell out to PE and to move to a site-lite policy. Comments were to be hosted on other blogs, but the problem is now they are doing so well there is no spare capacity.
    The PE guys haven’t been much help, apparently, mumbling something about being busy in the greenhouse and that they are his loans anyway and his problem.

  10. David Manners
    August 23, 2010 20:17

    Yes I still don’t know what’s happened to them, Mike, our IS people are trying to work this out.

  11. Mike Bryant
    August 23, 2010 20:11

    I noticed some of my comments had gone AWOL and assumed the great censor in the cloud had got to them :-)

  12. David Manners
    August 23, 2010 16:26

    Thanks Stooriefit – you’re absolutely right. I have mentioned it to our technical IS guru and he’s going to ‘re-publish the site’. I’m not exactly sure what this entails but it will take a couple of hours or so. It will, he says, ‘bring back the comments if they’re floating around somewhere in cyberspace.’ So I’ll have another look around 7-ish.

  13. Stooriefit
    August 23, 2010 16:03

    David, some of the comments seem to have disappeared – is this another example of PE value destruction?!

  14. David Manners
    August 23, 2010 12:13

    Thanks for the giggle, Dr Bob

  15. Dr Bob
    August 23, 2010 11:49

    NXP stands for Now eX Philips, same experience when it comes to support, products and behaviour.
    Philips sold their instrumentation division to Fluke which explains the saying “If it works it must be a Fluke”

  16. David Manners
    August 21, 2010 12:33

    Trying to get consistent figures out of these financial types is like trying to nail custard to the wall, Stooriefit. I’m sure if you asked an 18th century Bristol slaver if he could justify his trade in terms of the social cost it carried, he would have had a ready answer. Very likely the PE people have a ready answer to justify the harm they bring to to people and families. But both the slavers and the PE people have something in common – they are engaged in a nasty trade which governments have to curtail.

  17. David Manners
    August 20, 2010 12:20

    I’m as confused as you, Anonymous, I always thought that $8bn+ was the price for 80% putting a value on the whole company of $10bn+ – but, in the Q2 earnings report, it said the $10.6bn was the purchase price paid for 80% – which surprised me. If $10.6bn is for 80% that values the whole company at $12.7bn and now, I think, the market valuation is under $3bn so, without debt, it could be valued at 3 + 5 = $8bn. So we’re looking at $4bn+ of value destruction.

  18. David Manners
    August 20, 2010 12:08

    Crikey, FTM, that sounds like incitement to communism. I’m sure you’re right in saying the biggest cost is the social cost. But the point of the post is to show how inefficient and incompetent these PE people are. The EU is changing the law to make it more difficult for PE – which has found tax loopholes and gullible bankers (which tax-payers bail out) to promote the social devastation. It’s the EU’s fault – they should have acted sooner. We know we have to act agaisnt the worst type of capitalist – unless you want kids up chimneys again.

  19. FTM
    August 20, 2010 11:46

    Gentlemen, everything is unfair in business. So accept it and get over the whining.
    The decades of near-socialistic EU based high-tech industry are gone. The pertinent questions to ask are: What did mankind lose due to this KKR kamikaze? Will we be deprived of wonderful TVs, mobile phones, STBs, e-passports, what-have-yous forever – or for a period of time? What fantastic technologies crash landed? Will our carbon footprint get worse?
    The hard truth is: Chances are, none of the above.
    The M&A process, for all its faults, will absorb leading technology (and its true proponents), as long as there is business sense in doing so. In other words, whatever manna was created by Philips Semi/NXP, as long as it brings $$$…will continue to live, albeit with new names. On the social front, there are repercussions, but let’s not blame KKR for that..because the EU social net is responsible for handling the consequences (and more importantly, for having let things come to such a pass).
    “Good riddance of bad rubbish” is how a dispassionate English man I knew described a layoff at a German multinational in UK 11 years ago.

  20. Anonymous
    August 20, 2010 10:54

    Confused about the valuation figures used here, hope you can clarfiy. As I understand, if 80% of a liability-free NXP was valued at $10.6 billion at purchase, this would be what 80% of its total assets was considered worth then. Now, with $5.3 billion debt, the market values NXP at $3.5 billion. ie. the market considers NXP’s total assets to be worth $8.8 billion. 80% of that would be $7.04 B… still significantly lower than the original 10.6 Billions, but not as bad as the $2.8B figure makes it look.
    Taking nothing away from the fact that private equity has made NXP a shadow of what it was…

  21. The Knight
    August 20, 2010 08:32

    I think anyone who worked for Philips Semis at the time could see what was ahead, the talk from management and PE was all very upbeat but could not hide the track record of PE takeovers of the past. The effect on NXP was pretty devastating, the sell-off of the mobile division resulted in many lay-offs (and they are still going on) and the sell off of the Home division to Trident has had a pretty similar effect. The UK workforce has been decimated, all that experience and competence in complex SoC development replaced by R&D in China.
    Yes, PE, and especially KKR have a lot to answer for. I would ask if they sleep soundly in their beds at night but I’m afraid the answer would be that they sleep better that any of the poor buggers who have been involved in this travesty!
    An interesting PS, remember all the headlines when Twinings wanted to lay off >100 people and transfer their jobs to Eastern Europe? Local news, Unions screaming, pickets, press etc etc. 300 highly educated, extremely competent engineers laid off at NXP in the South in the past 2-3 years, not a sausage. Just think, if Twinings had done it 20 people at a time, no-one would have noticed…….
    (and I’m not belittling Twinings employees BTW)

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