bloggingbuyouts

Freescale is the old chip giant that was acquired by a private equity group led by The Blackstone Group (NYSE: BX), The Carlyle Group, and Permira Advisers. Prior to being public, this was a unit of Motorola Inc. (NYSE: MOT).

The company still has to report earnings as though it was a public company because of its ratings and because of its public debt. The company has shown that over the last twelve months, the company's adjusted EBITDA was $1.55 billion.

Net sales for Q1-2008 were $1.405 billion, up from $1.361 Billion in Q1-2007 and down from $1,539 billion in Q4-2007. Unfortunately, the company is still posting an operating loss of $152 million for the quarter, compared to $654 million in operating losses in Q1-2007 and $595 million in Q4-2007. The net loss after items for this last quarter was $245 million, also down from a loss of $539 million in Q1-2007 and down from a loss of $525 million in Q4-2007.

Its cash and total short term investments were $1.25 billion on March 28, 2008, compared to $751 million at the fourth quarter ending December 31, 2007; and its accounts receivable were $680 million and inventory was $732 million. But here is where things get tricky. Its long-term debt is $over $9.3 billion alone. Of the company's total asset base of $15.197 billion, more than $5.3 billion is goodwill and more than $3.6 billion was listed as intangible assets.

If you go back to the BloggingBuyouts article, "Why private equity firms avoid technology companies," you'll see that being a highly leveraged technology company that requires high capital expenditures isn't always the greatest place to be be. Unfortunately for all the private equity partnersm the company can't live on EBITDA alone and many believe that Freescale will need more capital and thus more leverage.

The original private equity deal was put at $17.6 billion for an enterprise value. So far that isn't turning out too great. Who knows, maybe a re-IPO of Freescale isn't too far off.

Jon Ogg is a producer and editor of the Special Situation newsletter for 247WallSt.com.

If you've ever wondered why so many low-P/E ratio technology companies haven't been gobbled up, there is a really good explanation: R&D, leverage, and volatility.

Business Week just ran a great cover story titled "When a Buyout Goes Bad" for this week's magazine. The case in hand is the old private equity buyout of Freescale, which was the chip business from Motorola Inc. (NYSE: MOT). This talks about a company that was turned around from the edge of the cliff by a great tech leader who created a great stock again. Then the $17.6 billion buyout came from a group led by The Blackstone Group (NYSE: BX), Carlyle Group, and Permira Advisers. This buyout came after being in a competing bid from a consortium led by KKR, Bain Capital, Apax Partners, and Silver Lake Partners.

Last year the company's revenues fell 10% while the chip sector revenues grew by 5%, then Motorola announced a spin-off or sale of its handset business, and then there is the issue of the $9.5 billion in debt that was clumped on top of the company to get the private equity buyout done.

Unless you are selling transistors and capacitors or just plain Jane DRAM, technology companies require heavy R&D commitments. This is why historically technology companies used to come public back before the 1990's "get rich from tech stock option awards" became the norm. The accounting changes required investor backers of a different group to mark down 15% of their $7 Billion stake as well. In fact, it notes that it is having a hard time ponying up the $1.2 billion for R&D and $400 million for capital expenditures needed for Freescale. And now there are inventory problems.

For me personally, I am not all that surprised that Freescale was a temporary success. One night right shortly before Freescale was spun-off by Motorola, I was flying from Austin to Chicago. I spoke to two workers that said they were low level managers for Freescale. When they called the company "Free-Fall" and told me about some of their pension or retirement issues and stock option plans getting mixed up (not for the better, at all), it left a bad taste in my mouth. Then when this one went private with that much debt and knowing what comm-chip R&D percentages of revenue were, I thought the billionaires were drinking too much of the cool-aid.

You should read that article as it puts it well into context. This is why niche technology companies generally end up being acquired by other niche technology companies or by larger tech companies that are competitors or that can complement each other. In mid to late-2006 you started seeing the private equity frenzy go into overdrive.

If you want good news or the silver lining, I do actually have some. I think that there will be another wave of public technology companies that get acquired. But the buyers will almost all be LARGER public technology companies. Private equity and technology can mix, but the deals need to be smaller deals with less leverage and in companies that require less R&D.

As rumored for some time, the satellite operator Intelsat Ltd. has been on sale. And today we know who the new owner is: BC Partners, a top European private equity firm.

The price tag? It's about $5 billion. Although if you add on the debt load (from a prior private equity deal), the amount comes to about $11.5 billion.

Interestingly enough, there were a number of strategic parties that wanted to buy Intelsat, such as EchoStar Communications. Yet with dirt cheap debt markets, the private equity folks were able to put together higher bids.

Actually, it was back in 2004 that Intelsat entered a buyout deal -- for about $3.1 billion. A year later, the firm purchased PanAmSat.

Basically, private equity firms like the rich cash flows of satellite companies. Also, the barriers to entry are considerable.

However the existing owners of Intelsat -- which include Apax Partners, Apollo Management, Madison Dearborn Partners, Permira -- will keep a minority stake. After all, in light of the growth in digital media and HD television, it's probably a good bet that Intelsat still has growth potential.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.

Over the past few years, private equity firms have shown an appetite for mega deals – and even riskier sectors, such as semiconductors.

A prime example is the $17.6 billion buyout of Freescale. The buyers included Blackstone Group, Carlyle, Permira Advisers, and the Texas Pacific Group.

Well, according to a piece in The Wall Street Journal [a paid service], the deal may show the inherent risks of the new approaches to private equity. Freescale has posted weak financials lately. A big problem has been the slowdown from major customer Motorola Inc. (NYSE: MOT).

Of course, the private equity sponsors understood the volatile nature of the semiconductor industry. They also realized that the debt markets were carefree with lending money. As a result, there is about $1.5 billion in Freescale debt that is variable. This means that the company can defer payments (kind of nice, huh?).

This is fine so long as the company eventually comes back. But, history is not so kind to semiconductor companies and there is certainly a good amount of competition. Another nice feature: Freescale can call on $750 million in new loans at any moment.

No doubt, it's good to be in the private equity business. Although, as for those holding debt in these deals, it does look fairly risky.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.

Intelsat Ltd., the mega satellite company, sold out for $3 billion in January 2005. The buyers included private equity firms Apollo Management, Apax Partners, Madison Dearborn Partners, and Permira Advisers.

Well, now it looks like Intelsat is going to be sold again, according to a report from the Wall Street Journal [subscription only]. The suitor is rumored to be the mighty Blackstone Group and the price tag could reach $6 billion.

Intelsat has a fleet of 51 satellites that provide an assortment of video, data and voice streams across more than 200 countries. The company is also a cash cow. In 2006, revenues were $1.7 billion and adjusted EBITDA was a cool $1.3 billion.

There is even a revenue backlog of $8.1 billion.

Moreover, the company is benefiting from some mega trends, such as HD television and the growth in home entertainment centers. There is also traction from IP traffic.

All in all, it looks like a savvy investment for Intelsat's current investors.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.