Private equity firms are notorious for maximizing profits by slicing and dicing the companies they acquire.
But a flurry of private equity activity in the semiconductor industry has some analysts wondering whether the opposite scenario is in the offing.
said in a statement Monday that it is in "discussions with parties relating to a possible business transaction."
According to a report in
The New York Times
, that business transaction is actually a $16 billion buyout offer from the
Texas Pacific Group
Kohlberg Kravis Roberts
Silver Lake Partners
have reportedly put a rival offer on the table.
Given that the latter group just announced the buyout in August of
, recently renamed NXP, it didn't take long for matchmaking speculation to run rampant.
"On the face of it, it seems like a pretty good guess," says Thomson Financial editor-at-large, Dan Primack, about KKR's rumored intention to combine Freescale and NXP. He says that private equity firms have increasingly engaged in so-called platform roll-up deals, in which the firms continue adding to an acquired company, rather than breaking it apart.
After all, Primack says, KKR would not likely want to have two companies in its investment portfolio competing against each other. "You don't want one company to succeed at the expense of the other," Primack says.
Whatever the motive for a potential buyout, the interest in Freescale hasn't hurt its stock. The company's shares closed up 19%, or $5.89, at $36.83 on Monday.
Freescale has a number of attractive assets to lure buyers, say analysts, pointing to the company's cell-phone chip business. Unlike the PC microprocessor market, the wireless handset business is still looked at favorably by investors.
Freescale may be dwarfed by cell-phone chip giants such as
, but it has a has a marquee customer in its former parent company
; and the company makes various key parts for cell phones, including baseband chips, RF chips and analog components.
"You look at the companies that have been doing well in cell phones -- it's companies that have a large percentage of the bill of materials," says Semico Research analyst Tony Massimini.
Roughly 30% of Freescale's sales come from supplying chips to automakers -- a business in which NXP also has a strong presence.
Combining the two companies and their complimentary businesses could create a much more dominant player in those markets than the two are able to be as separate entities.
Freescale and NXP each had roughly $5.5 billion in chip sales in 2005, ranking them twelfth and eleventh respectively among the world's top chip companies by revenue.
Together, Freescale and NXP would most likely be among the top five.
That's the model that
may have had in mind when they combined their chip businesses in 2003 to form
"Instead of two companies ranked somewhere between 5 and 15 every year,
Renesas is now one that's ranked consistently at number 5 because it's so huge," says Brian Matas, VP of market research at IC Insights.
What's more, Freescale and NXP have a history of working together, through the so-called Crolles alliance, named after the French town where it is based. The alliance is essentially a chip-fabrication and development facility operated by the two companies, along with a third partner,
That kind of collaborative history could ease the strains of blending two companies with different cultures and countries of origin.
Of course, private equity firms being private equity firms, some people on the Street say that slicing and dicing is inevitable if the two companies are brought together.
"Does it make sense to put the two together? Yes. But it's not one conglomerate, I think it will be two entities," says Satya Chillara, an analyst with Pacific Growth Equities.
Wireless, the highest-growth business that the two are involved in, represents the most obvious candidate for a spinoff, says Chillara. The balance of the business, automotive and networking chips, could go in another bucket.
According to Chillara, private equity firms could take the resulting new wireless-focused company public or look to sell it to another chipmaker.
Freescale is still a long way from being bought, though. And with the company's shares setting a new 52-week high, the company is getting more expensive every day.