A pack of four buyout firms led by the Blackstone Group (BX) paid $17.5 billion to take private one of the world's largest semiconductor companies, Freescale Semiconductor, at the end of 2006. The group hoped to grow the company (BusinessWeek, 11/27/06), which had been spun off from Motorola in 2004, in part through acquisitions. Yet ever since, Freescale has struggled, in part because Motorola (MOT)—which is having its own problems—remains one of its biggest customers. Some of the company's bonds recently traded for as little as 68¢ on the dollar, according to bond watcher MarketAxess (MKTX).
On Feb. 13, Freescale announced that Richard Beyer, the chief executive office of Milpitas (Calif.)-based chipmaker Intersil (ISIL), will replace Freescale's CEO, Michel Mayer. (Freescale announced that Mayer was leaving on Feb. 8.) BusinessWeek Senior Writer Emily Thornton, who covers private equity, spoke with Beyer about his plans to reverse Freescale's bad streak.
What attracted you to this job?
Freescale, in my judgment, is a fantastic company that has tremendous opportunities in the future. It has been one of the major semiconductor companies for many years. It continues to be one of the biggest and strongest companies. It has a strong management team, a strong customer base, and I'm enormously excited about the opportunity to drive it.
How would you compare what you've done at Intersil with what you will do at Freescale?
When I became part of [Intersil], it was involved in several markets and we elected to move out of one and focus on others. There was a transformation that had to take place. But once we became focused, we were able to drive very, very hard to outperform our peers in the last three years in terms of top-line growth and profitability.
Freescale's platform is significantly broader. The roots of success are deeper. But I think it has opportunities, like at Intersil, to expand into some markets and augment its success in the markets it is in with success in consumer areas, for example, in display technologies and the broad-based set of handsets. At Intersil, we acquired a number of companies to augment internal development. Freescale has demonstrated its willingness to do that with the announcement of its intention to acquire Sigmatel. We have the strength to augment internal development with acquisitions as well. So there's the similarity.
Is there a possibility that you might focus only on certain markets, as you did at Intersil?
No. This is a $6 billion company involved in so many different markets, with so many different product families. In that sense, it's a very different situation. It's established strong positions in markets, and the objective will be to grow those and augment them.
So you will stay in all of the markets.
That's my current expectation. Yes.
At Intersil, I believe you had a great deal of cash available to you. Freescale has just gone through a buyout. How do you expect that difference to affect the way you manage the company?
It's a different situation. But the fact of the matter is the fabric of the company is very strong. Last year, it performed very well against the backdrop of a difficult industry environment for semiconductors and the backdrop of issues with its major customer in cellular. It's been able to service its debt. It's been able to fund research and development at 21% of revenues so it didn't have to scrimp on investments to drive future growth of the corporation. And it was able to announce just recently that it was making an acquisition.
The fact that it has heavy debt is just the structure of the deal. I don't believe it's a problem in the sense that it will preclude us from doing the things we need to do in terms of investments or mergers and acquisitions.
Is 21% of revenues going to research and development an appropriate level?
It's too early to determine that. We'll need to look market by market [to know] how much we need to invest to be successful in those markets. How much we spend as a company will be the aggregate of that.
Some people say that when Motorola catches a cold, Freescale catches the flu. Is there any way to escape this fate?
I don't think we want to escape from having a customer as powerful as Motorola. What we have to do is build on it. In all areas that we do business with Motorola, it behooves us to have other customers and partners. But I would have killed at Intersil to have anything like the kind of relationship that Freescale has. I'm not looking to abandon that relationship or weaken it. (I want) to strengthen the relationship (with) Motorola and with other customers.