Tool Of The Devil
Freescale's abrupt sale probably signals the beginning of
the long-anticipated consolidation of the semiconductor industry. Will the
company's new owners pump it up to competitive size or break it up for quick
profits? In either case, you can bet that the only real winners will be
a handful of insiders.
by Lee H. Goldberg
It's difficult to know what to make of the sudden and unexpected acquisition of Freescale Semiconductor by the Blackstone/Carlyle consortium.
The charitable interpretation of Freescale's sale is that it's simply part of a long-expected consolidation of the industry, a natural adjustment to a mature, capital intensive market where there are too many vendors. We've seen similar economic pressures shrink the pool of airliner manufacturers down to a pair of giants and a handful of second-string manufacturers, forming a sort of climax ecosystem that is so familiar in other industries like automobiles and steel makers.
One could also interpret the $17.6 billion deal as a sign of a time with too much idle venture capital with too few legitimate opportunities to invest in. Past experience shows us that, much like idle hands, idle excess capital can quickly become a tool of the devil. In the absence of legitimate opportunities to fund new growth, it is invested in increasingly marginal ventures and, in other cases, used to acquire and manipulate a formerly-healthy company's assets to extract maximum shareholder value without concern for the long-term consequences.
I'll present what I know of the situation and let you draw your own conclusions.
Perhaps most remarkable about this whole deal is the speed at which it has gone through. The fact that it's been scarcely a week since the first public news of the initial offer from the cartel (which includes the Texas Pacific Group, Blackstone Group, Permira, and the Carlyle Group) to the time a deal was struck bears all the fingerprints of an inside job, a slick transaction that was quietly incubated for several months at high levels within Freescale before it ever saw the light of day.
It's difficult to say precisely what the Blackstone/Carlyle cabal will do with Freescale. One could hopefully speculate that since one of its members (Texas Pacific Group) already owns a big chunk of ON Semiconductor (Motorola/Freescale's power semiconductor division, sold to Texas Pacific in 1999) we might see the companies reunited to form a new electronic superpower. Unfortunately, given the past histories of most of the parties involved, it's more likely that the semiconductor giant will be broken up and its component business units re-sold for a tidy profit. Regardless of whether Freescale survives as even a fraction of its current size or not, you can bet that whatever's left after the bloodshed will be presided over by a bunch of bottom-liners who have no commitment to advancing technology, keeping the company's vast intellectual and technical resources intact, or much of anything else besides strip-mining the assets that took over 75 years to create.
The only remote hope for a good outcome depends on whether Freescale CEO Michel Mayer and his board of directors have both the ability and the interest to negotiate for some reasonable terms of acquisition to keep the plunder to a minimum and the company's resources as intact as possible. But given the fact that they are most likely the folks who helped set up the deal in the first place, not to mention some of the biggest beneficiaries from such an acquisition, this is a slim hope indeed.
While I'm not generally a big fan of large corporations, I'd posit that Freescale is a precious resource, one of the last of the giants which commands enough resources to support at least a few of its own proprietary semiconductor processes and fab operations, as well as a healthy deep R&D budget that could afford to look beyond the next year's business requirements. Like it or not, it takes an enterprise with this size (and historic commitment to technology) to be able to successfully roll out major computer architectures, incubate important bus and transport architectures, and other capital-intensive, long-lead, high-impact initiatives that move our industry forward.
We've already seen other major electronics players like ATT/Lucent/Agere, Siemens/Infineon, and HP/Agilent/Avago become shrunken shadows of their former selves while much of the intellectual and technical capital they had built up was lost in endless rounds of downsizing and re-organization. It would be a shame to see Freescale suffer a similar fate but its recent difficulty in clearly defining itself and maintaining dominance in several of its target markets after the spin-off from its parent company, Motorola, may have set it up for just that.
Sadly, the Freescale affair may signal the beginning of a reversal of the current merger and acquisition craze which began in the 1990s. For those of you who might have forgotten, our current merger-mania culture was preceded by an equally disastrous period when fashion-conscious executives thrilled the Wall Street types by swinging aboard large companies, paring them down, and stripping them of their assets with all the finesse of a 17th-century buccaneer. And, of course, on either side of the acquire/divest cycle, it was the companies and their employees (remember those folks, the ones who actually do the work?) who usually got the short end of the stick, while the executives, lawyers, and deal-makers walked away with their pockets bulging.
Comments? Questions? Prognostications about Freescale's future, or what weird new name the investors might choose for it? Write me at: lgoldberg@green-electronics.com
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