A successful initial public offering by NXP Semiconductor Inc. could mark the end of a financial drought in the IC sector and give other embattled chip makers the confidence to tap the equity market for fresh capital.
One company that is likely to see a successful NXP offering as a strong signal to accelerate efforts for a stock sale would be Freescale Semiconductor Inc., which like its European rival, was taken private in a leverage buyout by equity investors and similarly ran into strong operational and financial headwinds following the transaction.
NXP declined to comment on published reports it may be considering an IPO valued at about $1 billion but even if the timing is incorrect, the company will likely push towards a shares sale partly to reduce debts and enable the private equity firms that took it private in 2006 recoup their investments and earn some profit.
Recent actions by NXP management are consistent with actions by other companies taken private via the leverage buyout option in the past. First, it has streamlined product lines, reduced the number of business units and sold divisions in which it did not have a major market share, including the wireless IC business that was combined with a unit from fellow European chip vendor STMicroelectronics N.V.
Similar actions have been implemented across the Atlantic by automotive IC market leader Freescale, which is similarly weighed down by billions of dollars in debt. Actions by the two companies have included business reorganization steps meant to cut costs, improve product offerings, increase sales and margins ahead of a return to the equity markets.
The LBO firms that acquired the two companies have also recruited turnaround specialists—Richard Clemmer in NXP's case and Rich Beyer for Freescale—to execute tough internal reorganizations programs and promote public campaigns to return to the equity investment market.
Those efforts appear to be paying off despite the recent global economic turmoil that hurt sales across the industry in 2008 and in the first half of 2009. NXP's sales, for instance, shrank in 2009 to $3.8 billion from $5.4 billion in 2008, down 30 percent. The sales decline slowed sharply in the second half of 2009, however, as demand kicked up on a snapback in inventory restocking and improvement in the general economy.
For the first quarter of this year, NXP expects sales to be flat to sequentially higher, a testament to the continuing strength of the global economic recovery. More significant for the company's plans to return to the equity market, however, is its improving fiscal health. Clemmer has moved swiftly to reduce the company's total indebtedness since his appointment as president and CEO early in January, 2009, cutting down its long-term debt to $5.3 billion from $6.4 billion.
NXP has under Clemmer invested in joint ventures that could pay off handsomely in future. These include a 60 percent interest in Santa Clara, Calif.-based digital TV and set top box chip vendor Trident Microsystems Inc. and a 10 percent stake in Virage Logic Corp. The two investments could bolster NXP's cash position if it decides to unload its stakes in the joint ventures.
Perhaps the greatest push for NXP to go public is the desire of its private equity owners to divest their interest in the company and reclaim their investments in the company plus some profits. However, the peculiar difficulties faced by NXP has made developing an exit-strategy difficult for former parent Royal Philips Electronics N.V. and the Kohlberg Kravis Roberts & Co.-led equity investors that took the company private in September 2006.