PARIS – It’s summer, I am traveling, and you’d think the last thing I should be thinking about is Freescale’s $6.6 billion debt.
I agree. But somehow, that’s where my head is. Maybe this debt fixation is my way of channeling Eric Cantor.
But examining the issue more closely, it seems my worry isn’t so much the Freescale deficit, although $6.6 billion is unquestionably a whopping figure. Rather, I’m fascinated by the fiscal conservatism that seems to have captivated not only the political class (Washington’s – and London’s – newfound revulsion toward “deficit spending”), but also casual observers of, say, semiconductor companies.
Why is everyone so traumatized by debt?
You can argue – credibly – that Freescale’s debt has little to do with the United States’ national deficit. But I see a parallel in people’s reaction to the mere mention of any debt. Many, our readers included, seem to embrace a “perceived” conventional wisdom: “All debt is bad, and it should be avoided at any cost.”
Their reaction, respectful of Freescale but skeptical of the company’s future, ran the gamut. Their comments included: “I do not see Freescale getting rid of its suffocating debt load in the next 10 or so years”; “It’s not easy to survive in this Industry. The debt of this company is more than the revenue of most companies”; and “Without cash, they can't acquire a NSC [National Semiconductor] like TI did or acquire NEC like Renesas did, they are in need of either a very deep pockets investor, or someone (Chinese) to buy them. Their IPO (chuckle) illustrates that you cannot sell debt, just equity and they have little.”
Some readers went out of their way to point out Freescale’s great legacy, the good people working at the company and their solid products, while others complained about certain Freescale products and a lack of support for these products. But all in all, clearly, it was an overwhelming anxiety about that whopping $6.6 billion in the hole that made many readers feel downright uncomfortable about Freescale.
So, I decided to go back to Freescale, ask a few follow-up questions, and then see what financial analysts are saying about Freescale’s future.
My first stop was Alan Campbell, Freescale’s chief financial officer. He openly acknowledged, “Dark clouds are always there around debts. People tend to overreact.”
Campbell reminded me of the “perfect storm” of 2009. Freescale, then, was sideswiped by the losing market share of Motorola – its biggest customer. Simultaneously, Freescale had a head-on collision with the near-death experience of the U.S. automotive industry – another of Freescale’s crucial markets. Meanwhile, there was a global financial crisis.
In Campbell’s view, Freescale’s survival through that perfect storm over the last three years is nothing but a great recovery, if not a miracle.
If anything, 2009 would have been the time Freescale faced its worst crisis – including the possibility of default. “Today, [default] is not even discussed; we believe that we have truly put it behind us,” said Campbell.
Speaking as an engineer in an industry where longterm continuance of supply is a concern I view fablite with a jaundiced eye. Freescale and NXP specifically are to be avoided as they may not be around in 10 years and that sort of risk is to be avoided.
Thanks for a balanced view. It's really about winning new business. We've certainly seen Motorola setting itself up for building market share in the next few years. I don't know how much Freescale is in the middle. Freescale has to push hard on some of their innovation that's been percolating in recent years.
If the 'problem' with Freescale's debt load is that people are 'uncomfortable' with it, then discussing the details won't change their feelings. But what if its not 'revulsion' to their debt load at all but sheer common sense? The problem with attributing Freescale's survival in 2009 to 'a miracle' is that nobody knows what they did right. That does not bode well for management's overall strategy for navigating future storms.
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