October 4, 2006 – In a new SEC filing, Freescale Semiconductor Inc. details the steps and considerations over the past few months that led up to its courting and eventual buyout agreement with private equity firms led by The Blackstone Group. Among the info being revealed: the company privately mulled an acquisition of Philips Electronics’ former semiconductor business long ago, as well as a possible merger with an unidentified third party.
The filing provides an exhaustive look at the company’s business planning and strategic maneuverings after its initial public offering in July 2004, as executives and directors weighed the chip industry’s challenges and nuances (highly cyclical, rapid technology changes and product obsolescence, pricing erosions, historic supply/demand imbalances). In early 2006, Freescale hired consultants to help evaluate various strategic alternatives, including “possibly acquiring the semiconductor business of Philips Electronics,” as well as began preliminary merger discussions with an unidentified third party.
In Nov. 2005, representatives from The Blackstone Group contacted Freescale to discuss how the private equity firm could help support potential acquisitions. The tone of those talks changed in May 2006, into a possible acquisition of Freescale itself. A special committee was formed in early June to valuate various strategic alternatives for the company, and an offer from Blackstone arrived days later.
The special committee meeting met again on June 9 to discuss the Blackstone proposal, as well as revisit the merits of a possible buyout of Philips Electronics, and the aforementioned preliminary merger with an unidentified “third-party.” Freescale’s interest in Philips continued after that company’s announcement in mid-June that it was considering a sale of its semiconductor business. Meanwhile, Freescale and Blackstone continued to assemble and share non-public information to assess a potential deal.
Debate over a possible bid for Philips’ semiconductor business was officially ended during a July 11 meeting, and days later Freescale’s unidentified third-party merger candidate said it was no longer interested.
On July 25, Blackstone delivered its first proposal to acquire Freescale ($35.50-$37.00/share). Freescale directors and advisors decided to put further discussions on hold to await the outcome of the much-publicized sale of Philips Electronics’ semiconductor business, in which Blackstone also was a bidder. After a rival private equity group won the Philips bid, Freescale’s directors reconvened and decided to recommence negotiations with Blackstone, but push for a higher price/premium. Blackstone agreed, if Freescale agreed to “expeditiously” finish due-diligence and let Blackstone line up additional financing.
By mid-August, Blackstone’s lack of progress in its due diligence prompted Freescale advisors to discuss “the need to seek significant improvements in certain terms relating to transaction certainty and the special committee’s flexibility to solicit and/or entertain alternative acquisition proposals.” This led into several discussions about soliciting other private equity bids — Notably from the group that had won the auction for the Philips Electronics semiconductor business (KKR, Silver Lake Partners, et al.). Such a combination promised “synergies” that could elicit a higher pricetag from the KKR group, but obstacles including higher risk, financing, and competitive overlap dampened enthusiasm, and KKR was not contacted. Freescale continued to hammer out financial terms with Blackstone, while planning to rely on a “go-shop” provision to solicit alternative acquisition proposals at a later date.
On Sept. 7 — just days before Blackstone’s proposal was to be announced — Freescale’s advisors, Goldman Sachs, were contacted by KKR and Silver Lake Partners, who expressed an interest in a competitive offer, emphasizing potential synergies with the newly purchased Philips semiconductor business. Freescale agreed to engage in discussions with KKR and Silver Lake, who returned with a higher offer than Blackstone ($40-$42/share and possibly more, vs. $38/share), who then countered with a “best and final” offer of $40/share and a halved breakup fee of $150 million — and said that it would terminate all discussions if its proposal was not accepted by Sept. 15. With that, and consideration that the Blackstone group was ready to close the deal immediately at similar pricing to the KKR deal, and with concerns about possible antitrust interest in a KKR-led Freescale-Philips combination, Freescale directors and advisors voted “unanimously” to accept the Blackstone deal.
On Sept. 16, the KKR/Silver Lake Group notified Freescale it was ending its pursuit. Under the “go shop” clause of the Blackstone deal, Freescale identified six unidentified potential strategic partners that, “based on size and business interests, would be capable of, and might be interested in, consummating a transaction.” But to date, none of these parties has submitted a proposal to pursue a transaction.