When a consortium of private equity firms, including Blackstone, Carlyle, and TPG, took Freecale Semiconductor private in 2006, it was hailed as a landmark deal that opened the doors of the technology industry to private equity. These days, the deal serves as more of a lesson on why tech firms make poor targets for private equity.
In fact, the BusinessWeek article says Freescale is shaping up to be “one of the ugliest buyouts in history.”
When the deal was completed for $17.6 billion, many observers noted that technology firms were no longer off-the-table for private equity firms. And indeed, a number of tech firms were then taken private during the private-equity boom.
For a long time, the technology sector had been thought to be a poor feeding ground for private equity firms. They require massive research and development investments that crimp the cash outflow model of most private equity firms. They can be highly volatile, especially in the boom and bust world of semiconductors.
How the Freescale deal has gone is an indication that these warnings are founded. According to an article in BusinessWeek, sales started to declinejust months after the deal’s close. Freescale’s biggest customer, former parent Motorola,cut orders, and revenues for 2007 slipped 10 percent, to $5.7 billion, even as the industry’s increased 5 percent. In fact, the BusinessWeek articlesays Freecale is shaping up to be “one of the ugliest buyouts in history.” Things are so bad that Freescale’s owners have written down their $7 billion equity stake by 15 percent or $1billion.
Certainly the buyout business is tough all over these days with the credit crunch making it tough to get financing at favorable terms. But technology deals done in the heydays of private equity appear to be the most troubled. Bonds of First Data, purchased by KKR in 2007, now trade at 83 cents on the dollar. David Bailin, president of alternative investment solutions at Bank of America told BusinessWeek: “Tech buyouts are where the land mines are.”
Freescale may be the poster child for how tough technology can be more private equity buyouts, but there are likely to be many more lessons.