Look out, Texas Instruments Inc. and Infineon Technologies AG. Your closest competitor in EDGE baseband chips and W-CDMA RF transceivers, respectively-Philips Semiconductor-has a new, ambitious owner anxious to position its acquisition to eat your lunch. Or at least grow Philips Semiconductor by feeding on the market share of other players such as Broadcom Corp., Freescale Semiconductor Inc. and Analog Devices Inc. in EDGE and Qualcomm Inc., Freescale and Renesas Technology in W-CDMA.
Overall, Philips Semiconductor ranks as one of the top 10 chip vendors in the world, though it alternately leads or follows its competitors in market share, depending on the specific technology in question.
Philips Electronics sold just over 80 percent of Philips Semiconductor for $4.35 billion in cash and $5 billion in debt assumption to a group of private-equity investors led by Kohlberg, Kravis Roberts & Co., Silver Lake Partners and AlpInvest Partners NV. Press accounts had several private-equity firms in the running, which may have sent the purchase price above analysts’ consensus.
According to parent company Philips Electronics, it wanted to shed its semiconductor unit-which like many firms in that space experiences volatile earnings patterns-to improve its own earnings picture and to focus on higher margin businesses such as consumer electronics and health care.
The parent has 160,000 employees and nearly $39 billion in revenue last year. Philips Semiconductor, which has 37,000 employees, earned $389 million operating profit on $5.8 billion in revenue in 2005, according to Gartner. But sales in 2005 grew only 4.7 percent, below an industry average of 5.7 percent. The parent company had earlier this year announced plans to spin off the unit.
Though Philips Electronics-which recently announced that it would drop the “Electronics” from its name to reflect its broader corporate scope-will lose its semiconductor unit as a vertically integrated, in-house source of chips, 90 percent of the unit’s chips were sold out-of-house.
Philips Semiconductor possesses a robust portfolio of intellectual property for the wireless sector. Besides EDGE basebands and W-CDMA RF transceivers, that portfolio includes IPR in TD-SCDMA for the Chinese market, VoIP, WLAN, FM radio, DVB-H, USB, Bluetooth, WiMAX, unlicensed mobile access technology and near field communications. The company also works in the areas of personal and automotive audio systems, set-top boxes for home television, RFID chips, SIM cards and microcontrollers for computers and telephones.
“Historically, Philips Semiconductor has been known as a technology powerhouse, but a lackluster marketing house,” said Will Strauss, principal at Forward Concepts, Inc., which tracks the semiconductor industry. “They’ve come a long way in cellular in just the last three years.”
Kohlberg et al represents “smart money” that wants to shape up the company-spruce up its balance sheet, crank up aggressive marketing-and take it public in a couple years when the IPO environment is more favorable than today, according to Strauss. “They’re really betting on the future,” Strauss said. “They [Kohlberg et al]don’t want to run a semiconductor company.”
The deal is set to close in the fourth quarter, pending governmental and regulatory approval. The new entity will be run by Franz van Houten, current chief executive officer at Philips Semiconductor, and will be renamed “in due course,” according to a press release issued by both seller and buyer.
Ton Van Kampen, vice president for marketing and business development at Philips Semiconductor, said his firm has specific strengths in systems, low-power processors for cellular devices, chips for the DVB-H standard for mobile TV and mobile/fixed convergence, such as UMA, which enables seamless handoffs between cellular networks and Wi-Fi hot spots.
Philips Semiconductor operates based on four business models, according to van Kampen. Discreet, application specific integrated circuits such as RF transceivers and application processors that are sold to original equipment manufacturers and. Application-specific products such as FM radio chips, WLAN and Bluetooth. Complete reference phone designs for ultra low-cost handsets. The biggest, fastest-growing area is a product dubbed Nexperia Solutions, which provides a printed circuit board with the full complement of EDGE components-baseband chip, application processor chip, RF transceiver chip, power amplifier chip and power management chip and core software.
Philips Semiconductor’s chip designs are worked out in France and the company does its own chip fabrication as well as partnering with rivals ST Microelectronics and Freescale. Philips uses chip fabrication facilities run by TSMC in Taiwan and ASMC in Singapore.
Van Kampen said that trends in his company’s space include nascent markets such as HSDPA (the 3G flavor of GSM), more powerful multimedia capabilities in handheld devices, pressure to “go small” (i.e., more chips in one stack), integration of passive components and low-power consumption requiring software, and system know-how.
According to Strauss, Philips Semiconductor’s re-positioning as a standalone company will allow the flexibility and nimbleness to pursue its strengths in the market without a giant corporate parent.
“Remember,” Strauss said. “Philips Electronics started out as light-bulb company.”
