NXP: The private equity experience

Companies (partly) owned by private equity do not always appear in the news positively: They are often accused of lack of innovation, short term vision and even job losses. Today – exactly 7 years after NXP was acquired by private equity companies -is a good time to reflect on the journey we’ve been on and see if our private equity experience has been a positive one or not.

It was in December 2005 when Gerard Kleisterlee, the (then) CEO of Royal Philips Electronics, announced the organization’s intention to divest its semiconductor division. Exactly 9 months later Philips sold 80.1% of its shares in its semiconductors division to a consortium of private equity funds, and NXP Semiconductors was born.

Although NXP was established in a period of economic prosperity, we were soon facing a worldwide economic downturn, considerable price erosion and stock surpluses that reduced revenue growth and which led to a negative result for NXP. In the summer of 2008 plans were made for an extensive reorganization with the aim of achieving a cost reduction of US$550 million per year. This resulted in the loss of 4500 jobs worldwide.

From the very beginning, Private Equity owners have encouraged management to sail close to the wind. This means better managing costs and working more efficiently, but also abandoning projects that won’t pay off in the long term, dispensing with activities at which you cannot excel, and always wanting to be better than the competition. During the years our Private Equity partners have worked together with us to transform NXP into a considerably improved and world class semiconductor company with a strong future. And, if you believe the newspaper headlines from 2008 and 2009, the Private Equity parties and their stringent measures probably prevented the downfall of NXP.

Although we’ve had to implement several reorganizations, and some painful measures, the company is doing significantly better since then. A renewed focus on high growth, high profit markets, such as High Performance Mixed Signal chips, combined with both business and debt restructuring, has led to a thriving business. Since the spin-off from Philips, our debt dropped from US$ 5,751 billion in 2006 to US$ 3,381 billion in 2013. And with our Q2 2013 revenues hitting US$1.15 billion (up 12% year on year) and results in the higher end of our guidance, the company has been transformed from its 2009 position, when the future of the company appeared fundamentally uncertain.

Our share price this summer is higher than it has ever been: Our stock value rose from US$5,47 billion in 2006 to US$9,11 billion in 2013. Based on the current share price of US$36,30 (August 26, 2013) our total enterprise value (which includes stock value and debt) rose from US$11,22 billion to US$12,49 billion.

Since our IPO in 2010, private equity stockholders have sold part of their shares, and do now not longer have a majority (reduced to 34%). NXP is now ‘lean and mean’ – without losing its social face.

It was the tough decisions made by the board and the owners that saved NXP from potential downfall. Private equity firms took a gamble on NXP back in 2006 – it paid off not just for them, but for NXP, our staff and customers.

Guido Dierick
Guido Dierick
Guido Dierick is executive vice president, general counsel, secretary of our board of directors and member of the management team. Since 2000 he has been responsible for legal and intellectual property matters at NXP. He previously was employed by Philips from 1982 and worked in various legal positions.

7 Comments

  1. Avatar Sohaib Maalik says:

    NXP may have been doing better at the moment, by means of better managing costs and working more efficiently (as claimed in the article). The reality is in long run it will eventually fall down. NXP strategy is to offer numerous intern-ships and Thesis projects to young students who are about to graduate in order to bring down the costs but they are not hiring young blood once they finish their studies. NXP is relying on experienced work force which is working within NXP for 10-20 years and in some cases even more than this. In my opinion, there is lack of planning and vision for long term future of the company since young blood is not getting hired and experienced people have no one on their behalf to transfer their expertise and experience to ensure a smooth transition. In the long run, it will cost NXP dearly. That is what i have seen and felt while working at NXP as a graduate student myself.

  2. Avatar Sean Ke says:

    It’s an interesting story disclosing how private equity partners help a high-tech company live and grow in early ages. Currenlty NXP has become a more public company, it’s time to accompany with it on the exciting journey from good to great, still have long way to go.

  3. Avatar NXP Recruitment says:

    Thanks for sharing your thoughts and concerns. At NXP we do have various recruitment programs in place, which provides internships and job opportunities to attract new talents.

    At any given moment – on a global scale – we have over 250 vacancies. Per year we hire a few thousand people. We also give a lot of students and masters the opportunity to do an internship and or write a thesis for PhD.

    Unfortunately we are not able to offer all these interns a permanent job. We are very lucky that we have very committed and engaged employees. Therefore in R&D in Europe the attrition is very low. The ‘downside’ of this is that in Europe in R&D on a relative scale we have less vacancies compared to the number of interns.

    Last year for instance 5% of our hires were graduates. And at the moment we also have several internships and permanent positions open, where we are hiring (recent) graduates.You can find these on our global career page http://www.nxp.com/jobs.

  4. Hi Guido. There’s some very interesting stats in this post. Glad to hear that your gamble paid off!

    Best wishes, Alex

  5. Avatar Mark Salogaol says:

    As I was reading “The private equity experience” my amazement about the distortion of facts continued to rise.
    Initially a bit of the history is described. Until there I was just reading. It is a pity that the real reasoning by the then Philips top management to sell the Semiconductor division has never been disclosed… It would be a sad thing if it only happened because ‘financial analysts’ had been talking for years about ‘unlocking the real value’ of Philips by splitting it up. That in the process synergies are lost and the company weakened didn’t seem to be of any interest. Anyway.

    The previously mentioned distortion of facts starts here: “And, if you believe the newspaper headlines of 2008 and 2009, the Private Equity partners and their stringent measures probably prevented the downfall of NXP”, followed a bit further by “Since the spin-off from Philips, our debt dropped from US$ 5,751 billion in 2006 to US$ 3,381 billion in 2013”. The suggestion here is that Philips Semiconductors was in a terrible state, having a debt of US$ 5.751 billion in 2006. The truth however is that Philips Semiconductors may have had some problems, but at the same time had been in the global semiconductor top ten companies for over 30 years without interruptions. It was a good company, and debt free.

    The debt was artificially created the moment Philips Semiconductors was spun-off and became NXP. To blame were the parent company Philips and the Private Equity consortium. The 80.1% of the shares, representing a value of approximately 6.4 billion Euro (8.15 billion US$). were acquired by investing only around 30% own money and by borrowing the rest, and make NXP responsible for paying back that debt, plus interest. That NXP still exists and is even doing relatively well is not thanks to, but despite of the PE partners.

    Here’s what private equity is really about: A firm like Bain or KKR obtains cheap credit and uses it to acquire a company in a “leveraged buyout”. “Leverage” refers to the fact that the company being purchased is forced to pay for about 70 percent of its own acquisition, by taking out loans. If this sounds like an odd arrangement, that’s because it is.

    The term private equity simply refers to equity that is not public, like stocks.
    Once the buyout is completed, the private equity guys start aggressively cutting costs wherever they can – so that the company can start paying off its new debt – by laying off workers and cutting capital costs. This process often boosts operating profit without a significant hit to the business, but only in the short term; in the long run, this approach makes it difficult for companies to stay competitive, not least because money that would otherwise have been invested in expansion or product development – which might increase revenue down the line – is used to pay off the company’s debt.

    If the take-over fails within a few years, the PE firms usually explain this by economic conditions that changed in unforeseeable ways. But that’s precisely why loading firms with debt in order to reap short-term benefits is bad. It leaves companies unable to weather tough times, and allows private-equity firms to make money even if things go wrong.

    At the end of 2006 the economic situation was still good, but in 2008 and 2009 this had changed dramatically. NXP almost collapsed under the debt burden, struggling to pay the interest. The sale of the Mobile&Personal division may have been sold to the public and the markets as a strategic move. Apart from whether it was or not, without the proceeds of this sale NXP would have collapsed. It was purely an economic necessity due to the debt that resulted after the leveraged buy-out.

    It is regrettable that in NXP’s annual reports it is not visible how much NXP has paid to our PE investors for ‘management fees’. It would be interesting to know how much the PE companies have earned over the years via NXP.
    Rick Clemmer and his team did a great job in rescuing what was left to rescue, and driving down debt. And NXP is still a good company. But it is beyond me how it can be claimed that PE prevented the downfall of NXP. It is also worthwhile noting that a lot of the successful products of today like NFC still date back to the old Philips days and cooperation with the Philips Research labs.

  6. Avatar NXP Corporate Communications says:

    Dear Mark, we may have a different view on developments in the past, but we appreciate the diversity of opinions expressed on this blog. Best, Joon

  7. Avatar Dirk says:

    What a refreshing comment by Mark. I do not know the exact stats in the case of NXP, but this is how PE in a lot of cases work. In some cases you can say the are the savior of a company, keeping jobs and economy alive. But there are also a lot of cases where exactly happens what Mark describes, and surely this is the fact with NXP.
    In “The Economist” of this week: “Overleveraged firms avoid investing and concentrate on shrinking their balance sheets by paying off loans.” (Article: Debtors Prison, issue of October 26, 2013.).
    As we all know, investing is key to survive on the long term.

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