How to save a company: An inside look at Freescale’s turnaround

“There were a fair number of naysayers who felt that this was a really a bad situation and a terrible decision made by the PE firms,” said Rich Beyer, who became Freescale’s CEO two years after the PE consortium acquired the company. “These guys who invested in the company put a lot of time and energy into supporting me and (current CEO) Gregg Lowe and making the company a success.”

While other sources held back from calling the investment a success – the $7.4 billion of cash and stock generated by the sale will barely cover costs – the positive return saves the deal from being remembered as one of “the ugliest buyouts in history,” as Bloomberg portrayed it in 2008.

At the time, Bloomberg’s assertion did not seem far-fetched. Blackstone Group, The Carlyle Group, Permira and TPG Capital acquired Freescale in a $17.6 billion buyout in 2006. The semiconductor and processor manufacturer faced challenges on multiple fronts almost immediately.

Motorola, Freescale’s former parent and one of its largest customers for wireless chips, lost almost two-thirds of its share of the mobile phone market during the first two years of the investment, according to information technology research from Gartner.

Motorola’s struggles put Freescale on its heels at the onset of the global financial crisis in 2008. The crisis hammered Freescale’s customers in the automotive, networking, industrial and consumer sectors, which led the company to post an $8 billion loss in 2008.

“The first priority was simply to survive. When you take away the percentage (of) revenue that we had, between the Motorola losses and the great recession … it was literally, can we survive?” said an investment professional with one member of the investment consortium.

The company’s private equity backers marked down their holdings to as low as 10 cents on the dollar, sources said. Freescale’s CEO at the time of the acquisition, Michel Mayer, stepped down from the position in 2008.

“I think we all thought it was a reasonable goal to get our money back, but that we would have to dig in, roll our sleeves up, and that this was going to be three yards and a cloud of dust for a significant period of time, to use a football analogy,” the investment professional told Buyouts. “It wasn’t going to be fast.”

Finding a new leader

The first step for the deal’s sponsors was to find someone who could replace CEO Mayer. Establishing Freescale’s leadership team would be important within the context of the company’s ownership. As a club deal, Freescale’s investors often ran into issues in which there were “too many cooks in the kitchen” early in the life of the investment, said one former sponsor.

“The more firms that are around the table, the more partners who are used to being in charge, the more investment teams that have to get involved, the harder it takes to get a consensus,” the source said.

The group chose Beyer in 2008, which helped ease some friction between sponsors, sources said. As one sponsor characterized it: “Rich is a former Marine. He listens to input, but he’s going to take the hill. You can come along or you can stay at the bottom.”

Beyer, a longtime semiconductor industry executive with stints as the CEO of Intersil and Elantec Semiconductor on his resume, conducted a “significant amount of due diligence and soul searching” before joining the company, he told Buyouts.

“What were the issues facing the company, and what were the solutions that could be brought?” Beyer said. “I felt they could be solved. They weren’t insignificant.”

Repositioning for growth

Beyer’s first step was to address the company’s mountain of debt. The credit package assembled by the sponsors allowed Freescale to extend the maturities of $5.1 billion of its debt. The company used $1 billion of new debt to acquire existing debt for between 25 cents or 35 cents on the dollar, said Beyer. That move allowed the firm to purchase roughly $3 of debt for every new dollar issued, reducing the face value of its debt from around $9.8 billion to $7.6 billion at the time of its IPO in 2011, according to its prospectus.

“One thing that we did that was very right, and that gave us the freedom to maneuver at the bottom, was the capital structure,” said one sponsor. “We negotiated a very good capital structure that allowed us the room to run, the runway if you will, to get the ship righted.”

Perhaps more importantly, it also freed up capital to invest in more profitable business segments. With Motorola’s mobile phone business’s swift decline into irrelevance, Freescale closed its mobile unit and refocused its efforts on developing products for its automotive and networking segments, sources said.

The company emerged from the recession intact, thanks largely to its strategic repositioning away from mobile technology, reduction of its debt burden and development of new products, sources said. After stewarding the company through its IPO, Beyer handed over the reins to Gregg Lowe in 2012.

“When you line it all up, Rich (Beyer) saved the company and laid a foundation for growth, and Gregg ultimately exploited that growth opportunity,” said one sponsor.

Financial performance improved under Lowe. While the company continued to post losses through the early part of the decade, they paled in comparison to the $8 billion hit Freescale withstood in 2008. In 2014, Freescale netted $251 million, its first year of positive EBITDA growth in five years.

The company’s performance and subsequent sale to NXP brought relief to the sponsors. Nine years after the $17.6 billion buyout of Freescale, the company had finally emerged from the red.

And in stepped NXP Semiconductors to provide an exit. Its purchase values Freescale at $36.14 a share. Blackstone, Carlyle, Permira and TPG Capital as a group own about 205.6 million shares, or 65 percent of Freescale. At $36.14, the four will make about $7.4 billion or about $1.9 billion per firm. That is a little more than the $1.75 billion of equity each firm put into the deal in 2006. But it is a far cry the 44 percent paper loss the four sponsors were showing when Freescale went public in 2011.

Freescale’s managers “are getting articles written about how terrible they are, they’re getting no bonuses, (but) they’re still killing it,” said Paul “Chip” Schorr, the former head of Blackstone’s technology team. “That’s when you know, you know this is going to turn out fine. The question for me was always, when would the rest of the world realize that?”

Blackstone, Permira and TPG declined to comment.

Luisa Beltran contributed to this story