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NXP steps out of Philips' shadow

Posted: 22 Apr 2008 ?? ?Print Version ?Bookmark and Share

Keywords:NXP reorganization? asset-lite model? cost-reduction initiative?

NXP BV's promotional material describing the company as the "semiconductor company founded by Philips," will soon be dropped in an effort to establish its own identity and step out of its parent company's shadow.

Led by president and CEO Frans van Houten, NXP BV has, in less than a year and a half, instituted a major reorganization plan!dubbed Business Renewal Strategy!that is fast reshaping NXP into the antithesis of the company established 50-plus years ago by Koninklijke Philips Electronics NV.

Perhaps realizing that remaining competitive means operating less cautiously than it did as a part of Philips, NXP is pushing for lower costs through manufacturing rationalization and for faster growth through acquisitions.

Business restructuring
The restructuring process is likely to accelerate this year, if NXP's recent moves are any indication. They include the unexpected transaction earlier this month to merge the company's wireless-IC business with that of rival STMicroelectronics NV into a separate, joint venture, along with a February deal with Thomson to create a standalone can-tuner modules company.

Aside from a product-offering reorganization that observers believe will see NXP exit sectors where it doesn't hold commanding positions, the company's most drastic action!and the one that may help most in deflecting criticisms of its highly leveraged debt position!is likely to occur in manufacturing, where NXP is vigorously pursuing what executives describe as an "asset lite" production system. Here, NXP is sharply scaling back its involvement in semiconductor manufacturing, assembly and test in favor of outsourced production to wafer foundries and other partners.

The goal? "Our continued asset-lite strategy for manufacturing through partnerships not only reduces capital expenditure, but also enhances flexibility and time-to-market," the company states in a regulatory filing. "It enables us to maintain more optimized loading in the fabs in spite of cyclical demands."

Cutting costs
Pressure is rising across the semiconductor industry for companies to slash operating costs and divert more resources into R&D, sales and marketing, and programs to facilitate the design of their components into OEM products. NXP, especially, is feeling the heat, thanks to its November 2006 exit from Philips. While that transaction is generally considered a positive, credit-rating agencies were dismayed by the debt load the company took on during the separation.

NXP emerged from Philips with billions in long-term debt. It closed its balance sheet in 2007 with debt totaling approximately $6.53 billion, down slightly from $4.5 billion at the end of 2006. The company had $1.11 billion in cash and cash equivalents at the end of 2007!enough to fund operations, acknowledged Patrice Cochelin, a Standard & Poor's analyst. Nonetheless, Cochelin worries the company is in a precarious financial position and has it on a B-plus negative credit rating.

"The ratings on NXP are constrained by the company's highly leveraged capital structure!which restricts free cash flow generation, leaving reduced headroom for industry cyclicality or unprofitable investments!and by the group's recently weak operating performance," Cochelin said.

NXP executives agree the company should improve its capital structure, but they are less focused on paying down debt than on improving competitive position in key market segments. Managers are implementing a double-pronged strategy focused on acquisitions where necessary and divestiture when appropriate.

Deals left and right
In the past year, the company has aggressively pursued that approach by making small but strategic acquisitions and divestitures. In March 2007, for instance, XP bought the cellular communications unit of Silicon Laboratories Inc. and sold its cordless and voice-over-Internet Protocol terminal operations to DSP Group Inc.

The biggest change NXP has made in recent months!at least until the April deal with ST!was in manufacturing. It exited the Crolles2 Alliance, a joint R&D center in Grenoble, France, in 2007, within one year of announcing its intent, and quickly formed an alliance with Taiwan Semiconductor Manufacturing Co. Ltd for CMOS process technologies. NXP sold its share of equipment from the Crolles facility, receiving an initial payment of $129 million in December. Another payment is due by the middle of this year, according to NXP's annual report, issued last month.

Going asset-lite
To reduce costs further, the company merged its assembly and test facility in Suzhou, China, into a joint venture with Taiwan's ASE, and plans to proceed with other asset-lite activities this year.

The result of these activities has been a sharp reduction in NXP's capital requirements, according to Cochelin of Standard & Poor's. The company's business renewal program targets cost reductions of 250 million euros ($395 million) by the end of the year, up from 100 million euros ($158 million) in 2007. Execution, said Cochelin, "could be an important factor in improving operation and debt measures."

It's easy to see why an asset-lite manufacturing strategy might be the best fit for NXP. A big chunk of the company's selling, general and administrative expenses comes from its manufacturing operation, which in 2007 accounted for 44.5 percent of its total workforce of 37,627. Trimming that back through outsourcing!even by several percentage points initially!would dramatically improve the company's operating margins. At the same time, NXP would gain extra manufacturing flexibility by partnering with wafer foundries.

Simultaneous with the cost-reduction plan, NXP wants to be a major player in the industry's consolidation. To that end, it has earmarked a part of the $1.55 billion it expects to receive from the ST wireless deal for acquisitions.

NXP has not specified the areas in which it wants to bulk up, but they could include product segments where it can squeeze out further cost savings by improving its market position to No. 1 or No. 2. Already a major player in the automotive and identification markets, NXP will likely stress further investments in those segments, which are considered stable and profitable. Other likely areas of investment or acquisition include power management, a critical segment as the high-tech sector embraces further mobility, and software, where NXP has been trying to ignite growth by leveraging the thousands of patents it owns from the Philips days.

Road bumps
Those plans hold the seeds of tremendous opportunities and clear challenges for NXP, analysts said. First, the company is still completing its transformation into a separate entity after decades of operating as a Philips unit.

Additionally, NXP remains limited by its current financial structure. Relative to other big players, the company has limited cash on hand!ST, for instance could afford to pay NXP $1.55 billion without feeling the strain!and drawing upon its $791 million credit facility to fund operations or for acquisitions could further damage NXP's credit rating.

Also, as a privately owned company, NXP has limited opportunity to raise money through share sale and could find itself unable to make large-scale acquisitions that would give it the heft desired in competitive market segments. Already, credit-rating agencies are looking with displeasure at the company's announced plan to use the $1.55 billion from ST for acquisitions.

"Although small acquisitions are likely to be accommodated in the current rating, midsize ones, if executed in the near term, could reduce the company's liquidity or increase its leverage, which could add to ratings pressure," Cochelin said.

Warnings like this are unlikely to deter management. NXP might have been founded by Philips, but nowadays this IC supplier is acting all grown up.

If it succeeds, some of the shine will rub off on Philips. Otherwise, NXP might need a new slogan.

- Bolaji Ojo
EE Times

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