The two firms courting Freescale, the No. 3 U.S. chipmaker, are widely believed to be a consortium led by the Blackstone Group, which also includes Bain Capital, Texas Pacific Group, and the Carlyle Group; and a partnership consisting of the Kohlberg Kravis Roberts Company (KKR) and Silver Lake Partners.
Note that the latter group also acquired a majority stake in Philips Semiconductor this past August for $9.4 billion. Meanwhile, Bain Capital purchased Texas Instruments'
Freescale officials were quick to add when announcing these negotiations that "there can be no assurances that any transaction will result from these discussions."
This is true, and investors are wise not to get too excited before a deal is officially announced -- but they do have reasons for optimism.
For one thing, it's obvious from the earlier acquisitions of Philips Semiconductor and Texas Instruments' sensor and control unit that private equity firms are now beginning to view the semiconductor industry as a more mature sector, and that they see an opportunity to unlock some of its hidden value.
KKR, for example, could create synergy between Freescale and Philips. Both companies provide semiconductors to the automotive markets, and a merger of their respective divisions could reap significant savings.
In Bain's case, it is important to note that the earlier deal with Texas Instruments did not include the company's RFID (radio frequency identification) division. A partnership with Freescale could help fill this gap.
It's also quite likely that both bidders see substantial value both in the company's intellectual property and its ability to bring some innovative new technologies to the commercial marketplace. In July, for example, Freescale brought to market a four-megabit nonvolatile memory device using magnetoresistive random access memory (MRAM). The technology is not particularly imposing now, but it could lead to some niche applications in the emerging field of RFID.
As MRAM scales up, I am confident that a range of new wireless applications will emerge, because the technology can be incorporated onto existing chips. For instance, imagine a cell phone that could also read RFID chips embedded in products at your local grocery store.
I believe the bidders are ultimately eyeing these sorts of applications. At $16 billion, Freescale is a bargain. Even with its 20% jump yesterday, the stock is only trading at 19 times its estimated earnings, compared to the industry average of nearly 25. Investors should be patient; I suspect the bids will likely increase.
If things don't work out, however, I still like Freescale's technology, and I believe that current management will continue to take the stock higher over the long term. After all, since the company spun off from Motorola
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