Report: Freescale poised for buyout

September 11, 2006 – Two investment firm consortiums are in a bidding war to acquire Freescale Semiconductor, with the pricetag for the former Motorola chipmaking arm soaring past $16 billion, according to a New York Times report.

The frontrunner group includes Texas Pacific Group, the Blackstone Group, Permira and the Carlyle Group, but a rival group including Kohlberg Kravis Roberts and Silver Lake Partners is also at the negotiating table, having “swooped in with a last-minute offer that was higher,” according to the report, citing sources involved in the negotiations. KKR and Silver Lake led the recent $10.6 billion buyout of Royal Philips Electronics’ former chip unit, and aim to combine that business (since relaunched as a new company, NXP) with Freescale, according to the report.

Freescale, spun out of Motorola in 2004, is now the world’s 10th-largest chipmaker with nearly $6 billion in revenues, focusing mainly on embedded chips for markets including automotive and communications. A proposed Freescale/NXP combination would make sense insofar as both companies already partner for semiconductor manufacturing in the Crolles2 alliance in Europe, along with STMicroelectronics.

In a short press release, Freescale confirmed that “in discussions with parties relating to a possible business transaction,” but refused to discuss any details “unless and until it is appropriate to do so.”

Investor groups like the two suitors for Freescale, and those who pursued Philips’ chip unit, “have recognized that the semiconductor industry has shown an ability to increase margins even as growth rates have slowed and the inventory cycles have dampened,” according to American Technology Research analyst Doug Freedman. They also “have recognized that the fab light strategy has increased free cash flow and limited the impact of inventory cycles on the industry-wide margins,” he wrote in a research note.

Whichever group ends up acquiring Freescale, one of two scenarios is likely to play out, according to Freedman. Freescale could become a consolidating force, buying up other semiconductor companies deemed cheap investments or ones that have synergies in wireless and network processor markets. Or, the company could see more value in splitting off its wireless and TSPG/NCS groups, and sell one to fund expansion of the other, he wrote, in a research note.

Freedman believes the new owners of Freescale will consolidate several wireless and data transport semiconductor companies, to develop complete system-level solutions for the communications, automotive, and wireless markets. Revenues could swell to $8-$9 billion over the next 3-4 years — and maybe to $10-$12 billion if additional acquisitions are pursued — with a 18%-25% operating profit, and potential valuation of $30-$32 billion, nearly twice the current bidding price.


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