When a Buyout Goes Bad

When a posse of private equity firms decided to buy Freescale Semiconductor (FSL) in 2006, Michel Mayer was a major reason why. The 48-year-old Freescale chief executive had revived the chipmaker from near death after its spin-off from Motorola (MOT) a few years earlier, sending the company's stock price soaring. But on Feb. 21, Mayer stepped up to a makeshift podium inside the cafeteria at Freescale's Austin (Tex.) headquarters and delivered a dismal message to thousands of Freescale employees: "Welcome to the first town hall [meeting] of 2008, and what will be my last." Four weeks later the French-born CEO, known for his blunt manner and penchant for fast cars, was gone.

The acquisition of Freescale by Blackstone Group (BX), Carlyle Group, TPG, and Permira Advisers had provoked much skepticism in the buyout world. Private equity firms make money by acquiring companies, restructuring them, and then selling them off—and they usually finance the deals by loading the companies with debt. But the technology sector, with its massive research-and-development budgets and boom-and-bust product cycles, doesn't fit the mold. The semiconductor industry is more volatile than most, with sales sometimes whipsawing by 25% in a single year. Freescale's rich price tag—$17.6 billion, then the biggest tech buyout ever—raised more doubts among the financial cognoscenti. "The deal was priced for perfection," says one private equity veteran. In paying so much, the buyers—some of the world's biggest and most respected dealmakers—were essentially betting that nothing would go wrong.