Is Freescale Going From RIP to IPO?

Freescale Semiconductor's chips are found in the guts of everything from cars to Kindles. Yet it's better known these days as an example of private equity's outsized ambitions and the dangers of leverage. Over the last two years, Freescale's chief executive, Rich Beyer, has cut jobs, closed plants, and negotiated with bondholders to lower what was once a $10 billion debt burden. The next step of his turnaround plan is a surprise to many: Beyer wants to join the ranks of Skype, Demand Media, and Hulu and make an initial public offering.

Beyer says the economy will have to improve before Freescale can go public—and bankers say the company is now worth only 85 percent of the $17.6 billion price tag paid by private equity firms Blackstone (BX), Carlyle, Permira, and TPG in 2006, at the height of the credit bubble (page 41). And while the money raised in an IPO will go toward paying down debt, there's a lot of it left: $7.9 billion. That makes it the most indebted chip company in the world. "It's going to be difficult to find a way out from under their debt burden," says Gregory Fraser, an analyst with Moody's Investors Service. "There are still a lot of clouds overshadowing the company that they have to move away from before investors can be convinced."

Freescale's 2006 buyout was the biggest technology deal of the private-equity boom. Then the financial crisis hit, and Freescale was walloped by a combination of bad news. As a major provider of chips used in the world's automobiles, Freescale suffered as car sales plummeted in 2008 and 2009. Freescale's single largest customer, Motorola (MOT), hemorrhaged market share in the face of competition from Apple (AAPL) and other smartphone makers.

Beyer joined the company in March 2008. (He says the CEO of another chipmaker asked him, "Why would you join such a crappy company?") He closed three factories and slashed the number of design centers around the world from 66 to 23 as sales dropped from $5 billion to $3.5 billion. To convince potential investors that Freescale has bottomed out and is poised for a rebound, Beyer can point to three straight quarters of revenue growth, although the company is still in the red and reported an $18 million operating loss in the most recent quarter.

Beyer, who had boosted sales at chipmaker Intersil (ISIL) by 83 percent during his six-year tenure there, is now refocusing Freescale on sectors where he believes the company can be a first- or second-place contender. Freescale's applications processor is the main component in the two best-selling e-readers, (AMZN)s Kindle and Sony's (SNE) Reader, and Beyer says Freescale chips will be in future versions of the devices. Freescale chips also power Ford Motor's (F) Sync, an advanced in-car entertainment system.

"There was a complacency in the organization," Beyer said. "That is not me. I was a Marine officer. I like to win. We're not a pushover anymore."

The bottom line: Freescale, like other high-profile companies such as Skype, Demand Media, and Hulu is considering going public in the next 12 months.

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