Analysis: NXP's survival options must include more asset sales

Whatever ails NXP Semiconductors B.V. will not be resolved merely by the appointment of a new president and CEO, a surprising move made by the chip maker's board of directors in the final days of 2008.

In today's tough economic environment where chip sales are now forecast to tumble sharply in 2009, no industry executive, however talented and experienced, can dramatically alter a company's fortune.

However, the regime change at NXP may set off another round of structural realignment in Europe's semiconductor market as new CEO Richard L. Clemmer--a passionate deal maker with decades of experience as an industry executive and in the private equity field--is likely to force the company to face the reality of its declining fortunes and take tough decisions that could include a breakup or joint venture transactions.

Anyone expecting the status quo to remain unchanged should clear their desk. Despite his experience and knowledge of the the industry, not even Clemmer can surgically resolve NXP's boatload of problems without resorting to drastic measures. Reliable rating analysts currently give NXP is "vulnerable" and "highly leveraged."

The company is dealing with a plethora of problems, including sagging sales, non-stop reorganization and associated hefty costs, declining margins, widening net losses and huge debt servicing costs—up to $480 million per year, according to ratings agency Standard & Poor's.

NXP's Dec. 31, 2008, statement announcing Fran van Houten's departure offered no specific explanation for the transition. A close look at Clemmer's background offers some insights into both why the company's board selected him and what kind of structural changes might be ahead for the Eindhoven, Netherlands-based chip supplier.

"There are no changes in strategy planned at this moment," a spokesman for the company said in an interview.

Although Clemmer has held executive positions at various semiconductor companies, his strength and background is in finance. Clemmer is not a product guy; he is a money man with undergraduate and graduate degrees in business administration. He previously worked as CFO for Texas Instrument's semiconductor division and held the same position at Quantum Corp., where he helped lead the disk drive maker's $2 billion merger with rival Maxtor Corp.

Perhaps the most prominent role Clemmer has played in the evolving consolidation of the semiconductor market took place at Agere Systems Inc., the troubled communications IC vendor and former Lucent Technologies Inc. division, that, like NXP, emerged from its parent saddled with billions in debts.

At the most critical period in Agere's history in 2007, Clemmer drove the IC vendor's multibillion merger with LSI Logic Corp., moving on from there to strengthen his presence in the leverage buyout market when he joined equity fund investor Kohlberg Kravis Roberts & Co. (KKR) as a senior adviser. Prior to his stint at Agere, Clemmer headed Venture Capital Technology LLC as president and chairman, and was also a partner for two years at Shelter Capital Partners.

New job, same challenge, same solution

In his new position at NXP, Clemmer may reprise the roles he played at both Agere and Quantum before the companies were sold to rivals. For instance, prior to assuming the position of president and CEO at Agere in 2005, Clemmer initially served on the board of directors, which he joined in 2002.

Clemmer joined KKR as a senior adviser in June 2007 and was subsequently named to NXP's supervisory board. During the six months preceding his latest appointment as boss at NXP, Clemmer in a statement said he worked closely with predecessor van Houten to reshape the company.

"Rick has extensive executive leadership experience in the high-tech industry, including semiconductor, storage, e-commerce and software companies," Peter Bonfield, chairman of NXP's supervisory board, said in a statement. "He is very familiar with NXP and well suited to bring NXP to the next level."

It's not clear what that "next level" might be, but it's almost certain NXP will face additional structural adjustments. Clemmer will most likely accelerate the implementation of the company's ongoing structural reorganization, part of which led to the mid-2008 sale of its wireless IC business to STMicroelectronics.

That transaction boosted NXP's cash position by more than $1 billion, but by the end of November NXP was forced to draw down its revolving line of credit by $400 million in response to the deteriorating borrowing environment. The move lifted NXP's available cash to approximately $1.54 billion but with cash burn accelerating and sales slowing, the company would probably need to implement other survival strategy by the middle of 2009 unless revenue growth and available cash flow pick up strongly.