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NXP IPO route a ray of hope for chipmakers

Posted: 06 Apr 2010     Print Version  Bookmark and Share

Keywords:NXP share sale  IPO  initial public offering 

Perhaps the greatest push for NXP to go public is the desire of its private equity owners to divest their interest in the company and reclaim their investments in the company plus some profits. However, the peculiar difficulties faced by NXP has made developing an exit-strategy difficult for former parent Royal Philips Electronics N.V. and the Kohlberg Kravis Roberts & Co.-led equity investors that took the company private in September 2006.

IPO value
Not even NXP executives and their financial advisors could possibly predict exactly the value investors would be willing to put on the company until they begin the road trips designed to test interest in an initial public offering.

However, a share offering by NXP on the equity market is likely to draw strong interest from fund managers partly because of the company's considerable revenue—which could exceed Rs.19,856.11 crore ($4.3 billion) in 2010, representing a double-digit rise from 2009—its improving margins and sizeable positions in the automotive and identification and multi-market IC markets.

The main concern investors are likely to raise about a possible NXP shares sale would be about its high debt, which at Rs.24,473.81 crore ($5.3 billion) is still among the highest in the industry. The high leverage would certainly put a damper on the company's offering, which may compel executives to put an offer price below the level investors are paying currently for comparable companies.

EE Times estimates an IPO for NXP could value the entire company at anywhere from Rs.13,853.10 crore ($3 billion) to Rs.23,088.50 crore ($5 billion) depending upon how the sale is marketed and what management indicates they would do with the proceeds. If the company promises to plough the proceeds back into product development and debt repayment, its stock could rise with investors.

NXP must still convince sceptical investors to support its IPO, which could be the most significant equity offering in the semiconductor industry in years. Bond investors still holding on tightly to NXP's paper offerings are likely to be critical to this move. Many of them may opt to convert their paper holdings to stocks in the company thereby helping to further cut its interest expense payments.

The market is certainly ripe for an offering. After more than one year of middling performance, the equity market has been on an upswing with the Dow Jones Industrial Average tearing up 47 per cent in the last year while the technology-heavy Nasdaq Composite Index has soared 62 per cent.

Over the same period, the Philadelphia Semiconductor Index has climbed 63 per cent, boosting valuation at most chip vendors, including Advanced Micro Devices Inc., Intel Corp., Texas Instruments Inc. and ST, all of which have seen their market value rise at least 50 per cent or double in the last year.

This bodes well for NXP and may explain the company's willingness to start testing the waters for an IPO now. It also supports the likelihood that other high-tech companies, including start-ups, will look at either conducting an IPO or raising funds from the equity market for business expansion activities.

Rich Beyer, chairman and CEO at Freescale, has already indicated the company will explore the IPO option as soon as practicable. If NXP dives into the water first and depending upon investor reception to the IPO, Freescale might not be too far behind especially since it shares similar circumstances—high debts and investors eager to divest their holdings—with the European automotive IC rival.

- Bolaji Ojo
EE Times

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