NXP, private equity, and the future of SoC design
Ron Wilson - July 10, 2007
SoC design has become a sufficiently difficult and expensive undertaking that it demands attention to far more than just technical issues. For instance, there is the matter of private equity.
Generally, I’d say that the recent glut of cheap money and the consequent explosion in private equity activity have nothing to do with technical decisions in chip design. But one of the key factors in SoC design is the level of activity in the ASSP market. If an ASSP is available close to what you need, it may not make sense to do your own design. Equally important, when figuring out the competitive landscape for your new SoC-based design, you have to assume that smaller companies without chip design expertise will field products based on ASSPs that will emerge while you are developing your chip. So what happens in that market makes a difference.
And what has been happening in that market lately is that the major players have been getting picked off by private equity firms. Freescale and NXP, to name two, have recently been taken private. Does this matter, from the point of view of impact on the competitive landscape? It certainly does, if going private has an impact on these pivotal companies’ product strategies. And it seems clear that private equity does impact product strategy. The problem is that the experts can’t agree on how.
There are two prevailing views, one strongly pessimistic, and the other rather optimistic. The two have been nicely presented to me this week, one by a news story and the other by an interview with NXP.
The pessimistic view says that all private equity firms really do when they buy a company is to load it up with debt, use the proceeds to pay themselves and their investors a huge profit, and then flip the company back into the market, maybe after breaking off a few pieces and shutting down some cash-consuming operations. This view was strongly supported this week by no less authority than Moody’s, the credit rating agency. A Moody’s paper reportedly will argue that there is no good evidence that companies perform better in the hands of private equity, and that in fact they show the same sort of short-term behavior as publicly-held companies.
Observations in favor of this view include the virtual disappearance of research (as opposed to development) efforts once a company—NXP is an example here—is taken private. Also, one has to question what the huge debt load that comes with a private equity acquisition will do to a company’s ability to invest for the long term. Now instead of having to face greedy shareholders every quarter, management has to face savage debt payments every month.
The contrary view comes from inside NXP itself. Pierre-Yves Lesaicherre, senior VP and general manager of the standard ICs operation at NXP, said in a recent interview that NXP’s strategy, now that it has been taken private, is growth. “We want to gain leadership in the market for ARM-based microcontrollers,” he said.
Part of that growth strategy from the beginning has been acquisition. Thus, Lesaicherre said, NXP management met no serious objections when they told their new owners they wanted to buy an entire product line of ARM microcontrollers with integrated LCD controllers from Sharp Corp. They made the case that it was an important opportunity for market-share expansion, and that since NXP and Sharp used the same processes at the same foundry there were no design-retargeting risks, and out came the checkbook.
On one hand, first-person experience from inside an acquired company seems a lot more relevant than a rating agency’s opinion. After all, where was Moody’s when people were falling all over themselves to buy exposure to sub-prime mortgages? On the other hand, a senior manager in an acquired company would not be likely to publicly criticize his new owners. And NXP is just one data point.
So the question is still open. Will private equity gradually strangle the R/D efforts of companies like NXP and Freescale, substituting strategies of cost-cutting, acquisition and short-term revenue growth for a real vision of the future? Or will private equity, as it claims, prove to be the patient money, investing in the longer-term future, giving management room to plan and execute, and building stronger companies?
I have my reservations, but I think it is definitely too early to tell. As credit tightens and highly-leveraged takeovers become less possible, it will be important to watch exactly how the private equity owners are managing their acquisitions. Only that will tell us the future of the major ASSP creators that have been taken private. Will they gradually fade as their product lines cease to advance? Or will they pull ahead, invigorated by longer-term thinking and adequate funding for R/D, and provide a roadmap alternative to SoC development in major markets?