Representatives from the former Flextronics Software Services business are making the media rounds, clamoring for attention, now that the company is about to announce its new identity-fully six months after being weaned from its Fortune Global 500 parent last spring.
Six months is a long time to be nameless. The deal, way back in April, transferred 85-percent ownership of the former Flextronics International Ltd. division to Kohlberg Kravis Roberts & Co. and partners for $900 million. When you claim among your clients eight of the top 10 mobile device vendors, the 10 largest network equipment vendors and a handful of prominent network operators in the world, you’ve got reasons to be heard-especially if you wish to grow your business. (6,500 employees in 20 offices around the globe deserve a name, after all.)
But the bigger story is that the Flextronics Software Services business is the second major wireless-related acquisition this year by KKR and at least the third major deal transferring a wireless industry player from public to private hands. Freescale Semiconductor Inc. announced last month that it would be purchased by a private-equity consortium led by The Blackstone Group for $17.6 billion. And in August, Philips Electronics sold more than 80-percent equity in its Philips Semiconductor business-now known as NXP Semiconductors-for $9.4 billion to a group led by KKR.
According to at least one financial analyst, Albert Lin of American Technology Research, these deals are indicative of a renewed trend that has private equity vying with the public markets to grow value in wireless businesses. The precise reasons in each of the cited deals may differ, but Lin sees underlying fundamentals that may boost confidence in the wireless industry as a whole, or at least key segments of it.
First, there exists today more private capital available for high-technology investments than at any time in history-including the dot-com bubble years-according to Lin. Second, in recent years wireless technology has overcome the lag in performance between it and its wireline cousin.
“Wireless technology and networks have begun to deliver performance that outpaces advances on the wireline side,” Lin said. “Wireless is incredibly invest-able right now.”
In the Flextronics case, the Singapore-based parent is an electronics manufacturing service, or EMS, that is not benefiting from wireless industry growth due to massive competition in Asia; high, fixed overhead; and under-utilization of its manufacturing capacity. Flextronics’ software and design business (formerly known as Flextronics Software Services, which includes the renowned Frog design entity) has an opportunity to grow rapidly once weaned. The parent, by turning to private equity, could receive a sizeable chunk of capital upfront to set its progeny free while retaining a 15-percent slice of the business and future profits, Lin said.
From KKR’s perspective, freeing Flextronics Software Services from a stodgy parent and from the public markets’ near-term focus on quarterly profits will grow value that it can recoup in two basic ways as the business’ value ripens. If public markets rightly value the business and initial public offerings regain their luster in generating capital, KKR can take its acquisition public. Or it can seek to sell the business to another company in that space, effectively consolidating the sector as a whole and boosting profits for the buyer.
The Philips and Freescale deals were in the semiconductor space, where it is difficult to grow revenue and private equity involvement can consolidate the sector, boosting profits for the remaining players, Lin said. “Many more deals are coming in the next year or two, including some bad ones,” Lin said. “This is particularly true for players in multimedia and social networking.”
