Freescale Semiconductor Lbo

Freescale Semiconductor LBO

Background and Motivations of the Deal

The year 2006 was paramount in importance for the technology and financial sectors alike. The term “Leveraged Buyout” (LBO) was still relatively new, however savvy investors saw the opportunity to reap large gains from this type of financing and nearly 120 deals took place, totaling almost $225B worth of assets. Several of these deals were geared toward the technology sector through speculation that intelligence would soon become commonplace in all aspects of life, from cell-phones (which still came pre-packaged with the game “Snake”), to televisions, to automobiles.

The Austin, Texas based firm, Freescale Semiconductor, was an especially promising opportunity for private equity firms in that it was the largest supplier of automotive semiconductor technology at the time and it held potential long-term cash flows as the major supplier of silicon for Motorola cellular phones (RAZR, KRZR, etc.). Four PE firms (Blackstone, Carlyle Group, Permira Funds, and TPG Capital) came together to form a consortium that would create the largest LBO offer in the tech-industry’s history at that point in time.  The $17.6B dollar offer with 60% debt represented a belief that 1) the company was poised for success in upcoming years, and 2) with greater management control the firm could grow in the space more quickly than it can through its current financing. The March, 8th announcement immediately translated into a 21% increase in the share price of the firm.

There were several underlying reasons that the LBO seemed lucrative to private equity firms in 2006. First, the semiconductor industry was a large market with high growth rates compared other industries. Second, although Freescale was focused on consumer electronics (cell-phones) and automotive applications, the diversified cash flow of the firm made it attractive to debt issuers. Third, it was rumored that the operating strategy moving forward from the deal included consolidating several other semiconductor firms (operating within the wireless and data transport space) to build a robust product-portfolio in terms of breadth, which would make the firm a great takeover target upon exit.

From the perspective of Freescale, the deal was equally attractive. As of 2006, Mike Mayer, the CEO of Freescale, was seeking to accelerate the company’s profit growth, which lagged behind many other companies in the semiconductor industry. At this point, an LBO would allow Freescale to save on the costs of dealing with both shareholders and regulations. In addition, the increased debt load would add the necessary pressure to streamline operations and bring costs on par with other companies in the semiconductor sector.