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8/4/2006
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Philips Semi Goes Equity Route To Save Company

Royal Philips Electronics signed an agreement with a consortium consisting of Kohlberg Kravis Roberts & Co., Silver Lake Partners, and AlpInvest Partners NV for it to acquire an 80% stake in Philips' Semiconductors business, with Philips retaining a 20% share.

PARIS — After Royal Philips decided last fall that it's best to sell its semiconductor division, Frans van Houten, the CEO of Philips' Semiconductors business, had multiple options, including looking for a strategic partner for merger, a sale of the company— or parts of the company— to another semiconductor company, going for an IPO, or seeking private equity money.

In the end, van Houten decided to go the equity route. Royal Philips Electronics signed an agreement with a consortium consisting of Kohlberg Kravis Roberts & Co. (KKR), Silver Lake Partners and AlpInvest Partners NV for it to acquire an 80.1 percent stake in Philips' Semiconductors business, with Philips retaining a 19.9 percent stake in this business.

In an interview with EE Times Friday (Aug. 4)), van Houten said that his own thinking has evolved over the course of 12 months. Better quarterly results in recent months, and what he claims as the success of his "business renewal strategy" have given him and investors "a lot of confidence that we can lead on our platform," he said. Moreover, he said, "As we get more investment, we can start looking for acquisitions, and we can grow again."

Had Philips taken another path like a merger with another semiconductor company, alternatives would have been "massive restructuring and post-merger integration, which will result in the loss of our business focus when we really need to focus," van Houten explained.

But then, by going independent, what is it that Philips Semiconductors hopes to gain— that it wasn't possible when the company was a part of Royal Philips?

"We can act fast, we get more investment when necessary, and we penetrate better system divisions of our vertical customers, who have been uneasy about dealing with us because we are a part of Royal Philips," said van Houten.

On the downside, Philips Semiconductors will lose "a big mother ship," he said.

But the bottom line is it was Royal Philips who wanted to let go of its semiconductor business. Gerard Kleisterlee, president and CEO of Royal Philips Electronics, viewed the chip business too cyclical. The separation of Philips Semiconductors from Royal Philips wouldn't have happened, "if you were really loved," said van Houten.

On the other hand, what about all the intellectual properties and fruits of Philips Research's R&D activities— something Philips Semiconductors has always profited from and held an easy access?

25,000 patents— a quarter of Royal Philips' patent portfolio— will be transferred to Philips Semiconductors, said van Houten. The two companies also entered a royalty free licensing agreement for those that affect Philips Semiconductors' products.

Moreover, van Houten said, 350 people from Philips Research and 150 people from Philips' applied research will be transferred to Philips Semiconductors. Philips Research has also agreed to run on-going research programs jointly with Philips Semiconductors.

Will working with private equity investment companies prove to be tougher, because they tend to lack a long-term vision? "No. Why should it be any different? I expect them to fire me if I am not doing a good job as a CEO, just as I expected Royal Philips to fire me," said van Houten. "Private equity investment firms are perfectly entitled to seek for return on investment, just as a big corporate like Royal Philips does."

Besides, for the time being, van Houten is convinced that the consortium of the three private equity investment companies holds not only high hopes but high confidence in the growth of Philips Semiconductors. "We are the largest technology buyout ever, we were told," he added.

These private equity investment firms are "knowledgeable, experienced and extremely well prepared." But more importantly, "they are committed and they appreciate what we do."

Philips Semiconductors will launch a new name for its company on Sept. 1, 2006, the opening day of IFA (Internationale Funkaustellung)—the world's largest consumer electronics trade fair in Berlin.

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