Considering that it's the third-largest semiconductor company in the United States, Freescale Semiconductor had not been getting much attention.

That is, until a couple of months ago, when two private equity groups engaged in a bidding war over the low-key chip company. As of mid-September, Freescale had agreed to an offer valued at $17.6 billion from an investor group that included Blackstone Group, Carlyle Group, Permira Funds and Texas Pacific Group. Although Freescale's board approved the deal, a provision of the agreement allows Freescale to solicit other proposals for 50 days, according to the company. Regardless of who ends up acquiring Freescale, the sale would be one of the largest-ever buyouts of a technology company.

The acquisition shines a spotlight on the former semiconductor division of Motorola, just as CEO and Chairman Michel Mayer wanted to raise its profile. Mayer, who took the helm just before the division left its parent via an initial public offering (IPO) in July 2004, has quietly turned the company around—increasing gross margins, shoring up the balance sheet and revamping the company's culture.

The company's financial results have been impressive. It went from losing $366 million in 2003 to earning $563 million on $5.8 billion in revenue in FY 2005. Gross margins have improved from 29 percent in 2003 to as high as 46 percent in the company's second quarter, which ended June 30, 2006. In addition, the company has socked away more than $3 billion in cash and cash equivalents. Wall Street rewarded Freescale with a stock price that had risen from around $18 in July 2004 to as high as $33.23 in May 2006. The price shot up to around $40 in September on the news of the potential acquisition.

Analysts were surprised by the interest of the private equity companies. "Usually, the leveraged buy-out companies find some distressed property, buy it, fix it up and then do an IPO," says Will Strauss, president of Forward Concepts, a consulting and market research company. Freescale is the No. 1 supplier of automotive chips, communications processors and RF chips for wireless infrastructure, and the No. 2 maker of digital signal processors (DSPs) and microcontrollers. The company also is likely to rank as the No. 1 supplier of ZigBee chips this year, according to Strauss.

Strauss speculates that the acquirers hope to profit by splitting up Freescale and selling each of its three divisions separately. "That's the only scenario I can think of," he says.

Not only is the company financially healthy, but it also has excellent management. "The management team is the crème de la crème," says Tejinder Singh, managing director of Reliance Capital Management, an asset management company.

At the core of Freescale's improved performance are major changes in top management and corporate culture instigated by Mayer. As the Semiconductor Products Sector of Motorola, the business had become lethargic. Mayer needed to infuse the company with an entrepreneurial spirit.

"There were too many people who'd been there for 20 years and hadn't seen anything else," says Mayer, a French native who joined Freescale after a 19-year career at IBM. The managers and staff were good at following directions but not so good at making their own decisions, he says. "We were missing a sense of urgency."

Others put it more bluntly. "In the past, all they had to do was get a few more orders from Motorola and then go back to sleep," says Strauss. "All they cared about was making people happy up in Schaumburg [the location of Motorola's corporate headquarters, in Illinois]. That attitude had to change."

So Mayer, who had witnessed the cultural change during Louis Gerstner's tenure at IBM, shook things up. He established a new set of company values, emphasizing speed and personal accountability. And he instituted a weekly meeting schedule designed to ensure that managers talked regularly with their employees. "I insisted on it. I would go around the company and ask employees whether they had met with their manager that week," he says. If the answer was no, that manager heard from Mayer.

"Changing a culture is something that comes from a lot of small things," he says. "You change the behavior gradually, but you insist on that change. It needs to be understood that there's going to be a new way of doing things and it is not negotiable."

Another major change Mayer made was to clean house. He went through the senior management, losing some people he thought couldn't or wouldn't adapt and picking off talent from competitors to take their places. His goal was to bring in fresh perspectives from outside the company.

"We're trying to reinvent the talent base," says Sumit Sadana, senior vice president of strategy and business development, himself a new hire from IBM, where he was vice president of electronic design technology. "It's the only way we can take the company to the next level and sustain the momentum."

The influx of new blood has helped change the company. "Having so many world-class managers coming to their company gives the employees a sense of pride about what they are doing," notes Suji De Silva, an analyst at Cathay Financial. "They all bring fresh ideas and a fresh look at the market."

In fact, many of the new managers were brought in to play key roles in achieving the next round of goals Mayer has set for the company. Specifically, the company needs to grow revenue, which has been stagnant for the last two years, and reduce its dependence on sales to its former parent.

With a goal of growing revenues at least at the rate of the market (which has been averaging 9 percent to 10 percent), Mayer created a new position—senior vice president of global sales—in May and hired William R. Bradford, who had spent three years rebuilding sales and marketing at ON Semiconductor.

Freescale doesn't release specific numbers, but analysts estimate that 25 percent to 30 percent of its revenue still comes from Motorola's purchase of components for wireless handsets. In June, to help expand sales to the broader merchant market, Mayer hired Sandeep Chennakeshu, who was in charge of the mobile platforms business unit of Sony Ericsson, to head Freescale's wireless group.

"Sony Ericsson is the only company in the whole world that could provide complete chip sets for any handset vendor that wanted them," says Strauss. "That's one of the challenges Freescale's got: to be able to sell its cell phone chips to people other than Motorola. Chennakeshu was brought in for that specific purpose."

Freescale is starting to make some headway in the merchant market, says Cathay Financial's De Silva. He notes a deal with Sagem Communication announced earlier this year and expects more deals to be made public soon. "We think it is coming on pretty quickly on this and that it will be a viable competitor to folks like Texas Instruments or Qualcomm."

In addition, Mayer wants to continue raising gross margins, in particular by growing Freescale's high-margin analog business and by increasing the percentage of components it sells through distribution (which carry higher margins). To beef up analog, he hired Arman Naghavi, formerly of Intersil, to be vice president and general manager of the analog, mixed-signal and power division. To reinvigorate the distribution business, Mayer hired Rick Bosshardt, formerly vice president of worldwide distribution at Microchip Technology.

Mayer also wants to expand sales beyond Freescale's traditional automotive, networking and wireless markets into more consumer applications such as MP3 players and game consoles. The company has said that it wants to double revenue from the consumer market, from 10 percent to 20 percent, by 2009. A key to this effort will be its ability to leverage areas in which it already sells one or two chips. For example, the company already sells a processor that serves as the brains of a set-top box, says Singh. But that's just the one chip. Why not sell other chips to expand the STB to allow it to connect with other devices in the home? "This is low-hanging fruit for Freescale," he says.

At Freescale's annual technology forum last summer, Mayer noted that he wanted to raise Freescale's profile as an innovator in semiconductor technology. The company has certainly grabbed headlines, but it's not exactly what Mayer had in mind. "We are more innovative in more areas than you might realize or believe," says Mayer. "At heart, we are a technology company, and we want to be recognized as such."

Freescale has maintained a healthy investment in research and development, spending $1.2 billion on R&D last year and doubling the rate at which it is filing patents, he notes. That investment has started to bear fruit. Over the last six months, the company has announced a string of innovations in memory technology, chip packaging and digital-signal processing. It has begun volume production of the first commercial magnetoresistive random-access memory (MRAM), a new memory technology that combines the speed of static RAM with the nonvolatility of flash memory. It also unveiled its redistributed chip packaging technology, which can reduce semiconductor package size by 30 percent versus traditional ball-grid-array packaging. And it has introduced a quad-core 4-GHz DSP, the highest-performance DSP on the market.

In light of the acquisition, analysts wonder whether Freescale will move to capitalize on the Mayer's strategy.

"Mayer put a lot of the right people in place," says Strauss. "People were beginning to be more excited about the future of the company."