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NXP needs to sell more assets to survive

Posted: 07 Jan 2009 ?? ?Print Version ?Bookmark and Share

Keywords:NXP new CEO? asset sale? market semiconductor?

Whatever troubles NXP Semiconductors B.V. will not be resolved merely by the appointment of a new president and CEO, a surprising move made by the chipmaker's board of directors in the final days of 2008.

In today's tough economic environment where chip sales are now forecast to tumble sharply in 2009, no industry executive, however talented and experienced, can dramatically alter a company's fortune.

However, the regime change at NXP may set off another round of structural realignment in Europe's semiconductor market as new CEO Richard L. Clemmera passionate deal maker with decades of experience as an industry executive and in the private equity fieldis likely to force the company to face the reality of its declining fortunes and take tough decisions that could include a breakup or joint venture transactions.

Anyone expecting the status quo to remain unchanged should clear their desk. Despite his experience and knowledge of the industry, not even Clemmer can surgically resolve NXP's boatload of problems without resorting to drastic measures. Reliable rating analysts currently give NXP is "vulnerable" and "highly leveraged."

The company is dealing with a plethora of problems, including sagging sales, non-stop reorganization and associated hefty costs, declining margins, widening net losses and huge debt servicing costsup to $480 million per year, according to ratings agency Standard & Poor's.

NXP's Dec. 31, 2008, statement announcing Fran van Houten's departure offered no specific explanation for the transition. A close look at Clemmer's background offers some insights into both why the company's board selected him and what kind of structural changes might be ahead for chip supplier.

"There are no changes in strategy planned at this moment," a spokesman for the company said in an interview.

Bring in the 'money man'
Although Clemmer has held executive positions at various semiconductor companies, his strength and background is in finance. Clemmer is not a product guy; he is a money man with undergraduate and graduate degrees in business administration. He previously worked as CFO for Texas Instrument's semiconductor division and held the same position at Quantum Corp., where he helped lead the disk drive maker's $2 billion merger with rival Maxtor Corp.

Perhaps the most prominent role Clemmer has played in the evolving consolidation of the semiconductor market took place at Agere Systems Inc., the troubled communications IC vendor and former Lucent Technologies Inc. division, which, like NXP, emerged from its parent saddled with billions in debts.

At the most critical period in Agere's history in 2007, Clemmer drove the IC vendor's multibillion merger with LSI Logic Corp., moving on from there to strengthen his presence in the leverage buyout market when he joined equity fund investor Kohlberg Kravis Roberts & Co. (KKR) as a senior adviser. Prior to his stint at Agere, Clemmer headed Venture Capital Technology LLC as president and chairman, and was also a partner for two years at Shelter Capital Partners.

In his new position at NXP, Clemmer may reprise the roles he played at both Agere and Quantum before the companies were sold to rivals. For instance, prior to assuming the position of president and CEO at Agere in 2005, Clemmer initially served on the board of directors, which he joined in 2002.

Clemmer joined KKR as a senior adviser in June 2007 and was subsequently named to NXP's supervisory board. During the six months preceding his latest appointment as boss at NXP, Clemmer in a statement said he worked closely with predecessor van Houten to reshape the company.

More structural adjustments
"Rick has extensive executive leadership experience in the high-tech industry, including semiconductor, storage, e-commerce and software companies," Peter Bonfield, chairman of NXP's supervisory board, said in a statement. "He is very familiar with NXP and well suited to bring NXP to the next level."

It's not clear what that "next level" might be, but it's almost certain NXP will face additional structural adjustments. Clemmer will most likely accelerate the implementation of the company's ongoing structural reorganization, part of which led to the mid-2008 sale of its wireless IC business to STMicroelectronics.

That transaction boosted NXP's cash position by more than $1 billion, but by the end of November NXP was forced to draw down its revolving line of credit by $400 million in response to the deteriorating borrowing environment. The move lifted NXP's available cash to approximately $1.54 billion but with cash burn accelerating and sales slowing, the company would probably need to implement other survival strategy by the middle of 2009 unless revenue growth and available cash flow pick up strongly.

That's unlikely given the current state of the global economy and the double-digit sales decline expected for the entire semiconductor market in 2009. NXP itself has said Q4 08 revenue would probably decrease sharply sequentially in what should have been a strong three-month period for the company. Meanwhile, its ongoing reorganization could cost the company up to $800 million between 2009 and 2010, according to Patrice Cochelin, an analyst with Standard & Poor's.

"We expect NXP to use a large portion of its cash and a recent $400 million revolver draw to fund a $800 million restructuring program in 2009-2010, capital gain taxes, and debt repayment in the third quarter of 2009," Cochelin said in a statement.

The reorganization already carried out under van Houten will help position NXP for a market recovery. But the company won't be in the clear for some time due to complications injected into its survival program by the economic uncertainty that hit the sector in the second half of 2008. Furthermore, NXP cash position remains fragile despite the injection of funds from the wireless IC unit sales to ST.

ST has indicated it wants to acquire NXP's remaining 20 percent stake in the wireless IC joint venture, but terms, valuation and payment timing could be negatively affected by the ongoing market slowdown, according to observers.

"ST's recently announced intention to combine the joint venture with a division of Ericsson LM is likely to provide NXP with an early exit opportunity, if and when a transaction closes," said S&P's Cochelin. "We believe, however, that the recent and rapid slump in wireless handset markets could put pressure on the timing and valuation of the transaction."

Clemmer would therefore have his hands full dealing with other operational problems confronting the company, including what to do with its growth and profit challenged business divisions.

What goes, what stays?
NXP's home entertainment unit, for instance, posted a 20 percent drop in sales for Q3 08 and will likely record another sharp decline for the recently ended quarter. The division, which manages a joint venture between NXP and Thomson, could be a likely candidate for a small-size spinoff or sale to a bigger player.

The company's second biggest business division, the automotive and identification unit, is also facing similar sales pressure, which has accelerated in the last few months as demand for vehicles began weakening in several key geographical regions. The unit is profitable on an operating basis, however, and will most likely be retained by the company.

NXP's multimarket semiconductor business is its crown jewel and it's highly unlikely the company will dump the division. The unit eked out modest 2 percent revenue growth in the Q3 08 and, despite problems in the worldwide economy, will be the growth leader for NXP for the foreseeable future.

Perhaps one area Clemmer and his management team will focus their cost-cutting action is in the area of manufacturing. The sharp drop in sales has also eroded plant utilization, and this may force the company to accelerate efforts to further outsource manufacturing operations.

Clemmer executed a similar strategy at Agere, which faced similar debt leverage and manufacturing outsourcing problems. Most likely he will apply lessons learned during that stint at NXP. The only difference this time is that he will be dealing with a much bigger company facing even much more complex internal and external challenges.

The new NXP head is not getting much of a honeymoon. A spokesman for NXP said Clemmer was spending his first week at the company meeting with employees, customers and suppliers. Soon after, he will need to explain to NXP's investors his strategy for cutting the company's $6 billion debt.

Is anyone willing to bet this won't involve asset sales or another set of joint ventures?

- Bolaji Ojo
EE Times

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