Analysis: NXP Shares Sale Could Open IPO Floodgate

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. Not even NXP executives and their financial advisors could possibly predict exactly the value investors would be willing to put on the company until they begin the road trips designed to test interest in an initial public offering. However, a share offering by NXP on the equity market is likely to draw strong interest from fund managers partly because of the company's considerable revenue—which could exceed $4.3 billion in 2010, representing a double-digit rise from 2009—its improving margins and sizeable positions in the automotive and identification and multimarket IC markets. The main concern investors are likely to raise about a possible NXP shares sale would be about its high debt, which at $5.3 billion is still among the highest in the industry. The high leverage would certainly put a damper on the company's offering, which may compel executives to put an offer price below the level investors are paying currently for comparable companies. EE Times estimates an initial public offering for NXP could value the entire company at anywhere from $3 billion to $5 billion depending upon how the sale is marketed and what management indicates they would do with the proceeds. If the company promises to plough the proceeds back into product development and debt repayment, its stock could rise with investors. NXP must still convince skeptical investors to support its IPO, which could be the most significant equity offering in the semiconductor industry in years. Bond investors still holding on tightly to NXP's paper offerings are likely to be critical to this move. Many of them may opt to convert their paper holdings to stocks in the company thereby helping to further cut its interest expense payments. The market is certainly ripe for an offering. After more than one year of middling performance, the equity market has been on an upswing with the Dow Jones Industrial Average tearing up 47 percent in the last year while the technology-heavy Nasdaq Composite Index has soared 62 percent. Over the same period, the Philadelphia Semiconductor Index has climbed 63 percent, boosting valuation at most chip vendors, including Advanced Micro Devices Inc., Intel Corp., Texas Instruments Inc. and ST, all of which have seen their market value rise at least 50 percent or double in the last year. This bodes well for NXP and may explain the company's willingness to start testing the waters for an IPO now. It also supports the likelihood that other high-tech companies, including start-ups, will look at either conducting an IPO or raising funds from the equity market for business expansion activities. Rich Beyer, chairman and CEO at Freescale, has already indicated the company will explore the IPO option as soon as practicable. If NXP dives into the water first and depending upon investor reception to the IPO, Freescale might not be too far behind especially since it shares similar circumstances—high debts and investors eager to divest their holdings—with the European automotive IC rival.