Deals I Would Like to See, Part 2: Freescale IPO in 2011

{complink 2134|Freescale Semiconductor Inc.} is a much healthier company today than it was three years ago, but its fiscal condition could improve even more dramatically if the automotive and networking chipmaker takes the final steps resolutely toward becoming a publicly owned company.

Rich Beyer, chairman and CEO of the Austin-based company, has indicated several times that an initial public offering is the natural direction of events for Freescale. In April Beyer told me “an IPO is in fact the most likely scenario for Freescale.” (See Analysis: Freescale moves closer to IPO.)

In October, Beyer further clarified the situation in another interview during which he explained that certain fundamental conditions must be met before Freescale would make the expected dive into the public pool. First, the economic environment must improve, and “we will have to wait for sentiments to improve about the semiconductor market.”

I agree. However, those conditions are close to being met. The US economy is not in tip-top shape, but it is not weakening further either, and the major stock market indices have in recent weeks roared back to two-year high levels.

Considering efforts already made by Freescale to dramatically improve its operations, I believe the company should actively push for an IPO by the third quarter of 2011 at the latest. Conditions can never be optimal for any IPO; a natural disaster, an unexpected market glitch or some other unfavorable development can muddle up the most perfect environment.

If any company is primed for an IPO in this environment, however, it is Freescale. Its debts are still huge by industry standards — $7.6 billion as of the end of the September quarter — but take your eyes off of those numbers for a moment, and the picture that emerges is a company ready for a coming-out party. Quarterly sales have been climbing steadily, rising to $1.15 billion in the three months ended Oct. 1 from $893 million in the year-ago quarter.

Gross profit margins strengthened to 38.5 percent during the same period from 29.9 percent in the comparable 2009 quarter while selling, general, and administrative charges fell as a percentage of sales to 11 percent from 13.7 percent. Furthermore, the company had operating income of $1 million in the latest quarter versus operating loss of $18 million in the immediately preceding quarter and $261 million in the year-ago quarter.

More important, Freescale has adjusted its business structure to right about where it needs to be and refocused operations on the automotive and networking equipment markets, areas where it should continue to see steady and sustainable growth for the next years. In fact, after conducting a strategic review of operations in October, the management team concluded there were no “glaring weaknesses,” according to Beyer.

So, what's holding Freescale back from launching the IPO? I believe it is the perception that the market may not be ready for a debt-swamped company or that current shareholders may not be able to sell enough shares to recoup their investments. I disagree, however. Freescale's debt instruments are trading at a much higher level in the market than they were even two years ago, and investors are more trustful today of the team behind its turnaround and know the outstanding risks.

A large offering from Freescale will further confirm the growing relevance of the semiconductor market to the global economy. Chips are, after all, the anchor points for all the varied segments of the high-tech sector. All this will be factored by investors into an offering, and 2011 is the year the former {complink 3538|Motorola Inc.} Semiconductor Products Sector should make its big splash.

3 comments on “Deals I Would Like to See, Part 2: Freescale IPO in 2011

  1. DataCrunch
    November 9, 2010

    Hi Bolaji, No doubt Freescale is looking much better than it did a couple of years ago and that Rich Beyer has done an impressive job on this turnaround since he took the CEO role.  I know a couple of years ago Freescale was about $10 billion in debt and over the last 2 years the company has been about to reduce the debt by about $2Billion, which according to my calculations, they should be still in debt between $7-$8 billion.  This is still a large number to deal with and although their business may be experiencing a pick up, I don’t see an IPO until the global economy recovers.  I would say if they keep knocking down their debt and we see a significant enough recovery in the global economy in 2011, perhaps an IPO in 2012.   I think 2011 is still too soon for a Freescale IPO.

  2. Backorder
    November 10, 2010

    Agreed! Infact, I agree with Mr. Beyer and if you analyze his comments recently, there has been more than a hint of skepticism over the IPO. Although, it might just work but I dont feel that the CEO would bet on it. Everytime CFO Alan Cambell has to explain the Quarterly results outside of the GAAP to project a positive image of the company, but the bottomline is that the $7 B debt is impossible to ignore.

  3. Anna Young
    November 10, 2010

    If that's the case then the company may not have the IPO in 2012 or even by 2020. I don't see Freescale paying off the debts totally in the next five years. Companies typically roll over these debts. As long as it has the cash flow to service the debts and continues to work its way to profitability investors will be happy to have Freescale's debts rolled over. The purpose of the IPO is to help the company pay off the debts and make it a leaner and more competitive operation. I bet there are investors out there willing to take that chance.

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