Group Nears Record Deal for Chip Maker (NYTimes, 09/11/06)

September 11, 2006
Group Nears Record Deal for Chip Maker
By ANDREW ROSS SORKIN and JOHN MARKOFF
A consortium of investment firms was near a deal late last night to acquire Freescale Semiconductor, a former unit of Motorola, for more than $16 billion, according to people briefed on the negotiations. The deal, if completed, would be the largest leveraged buyout ever in the technology sector, surpassing the $11.3 billion sale of SunGard Data Systems last year.
The talks illustrate the increased appetite of private equity firms for the technology industry, a sector shunned for years by financiers because it was considered too volatile. But as technology companies have matured and private equity firms have begun to look for companies that are not simply stable, but also growing, more and more deals are taking place.
The heart of Freescale’s business is in making specialized, or “embedded,” chips that provide intelligence for things as varied as automotive engines and cellphones.
The consortium of investors in talks to acquire Freescale include Texas Pacific Group, Blackstone Group and Permira, these people said. It is possible that the Carlyle Group and Bain Capital could also join the group.
People involved in the discussions cautioned that the talks could still collapse or that an interloper could emerge with a higher bid. Indeed, yesterday afternoon, Kohlberg Kravis Roberts & Company and Silver Lake Partners submitted an 11th hour offer for Freescale, but it appears that the bid may have been too low and too late, these people said. Of course, it is possible that the group could return with a higher offer. Exact details of the bids could not be learned.
A spokeswoman for Freescale did not return a call seeking comment. Spokesmen for the consortium either declined to comment or could not be reached.
The semiconductor industry appears to be in a deal frenzy.
Last month, Philips Electronics agreed to sell 80 percent of its semiconductor division to a group of private equity firms ­ Kohlberg Kravis Roberts & Company, Silver Lake Partners and AlpInvest Partners ­ for 3.4 billion euros ($4.4 billion).
Furthermore, Advanced Micro Devices agreed to buy ATI Technologies for $5.4 billion in cash and stock earlier this summer.
Joe Osha, an analyst at Merrill Lynch wrote in a note to investors last month saying semiconductor companies were ripe for more deals. “We think that managers in the semiconductor industry need to start thinking more seriously about capital structure or risk some unwanted but long overdue attention from activist investors and buyout firms.”
Freescale, which was spun out of Motorola in 2004, is now the worlds’ 10th largest chip maker with some $5.8 billion in revenues last year. The company plays a major role in electronic markets including the automotive and communications industries. Customers include Motorola and their extensive line of cellphones, Sony Electronics, Whirlpool appliances, Cisco routers, and car companies such as Mercedes, BMW, Ford, Hyundai and General Motors.
The chips used in these companies’ products are similar to the microprocessors that control desktop and portable personal computers. However, the software that controls the chips is stored in special memory chips referred to as flash memory.
Freescale’s chief executive is Michel Mayer, who is a 19-year veteran of I.B.M.’s semiconductor business.
On Friday, Freescale’s shares closed at $30.75, up 43 cents. The company has a market value of $12.47 billion.