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 BusinessWeek's Emily Thornton has made a specialty of bashing private equity for years, and the magazine's April 14 cover story on the LBO of Freescale Semiconductor Inc. certainly continues in that vein: "When a Buyout Goes Bad: First came Freescale's ugly private equity deal. Now the chipmaker has lost its CEO -- and its bearings."
"[F]ew recent buyouts have been as disastrous as Freescale's," the story reports. Really? Thornton ably documents Freescale's travails since its biggest customer (and former parent) Motorola Inc.'s cell-phone market share plunged last year. But the story also demonstrates that BusinessWeek is incapable of understanding financial statements. The company had an operating loss of $539 million in the first quarter of 2007, immediately after the buyout closed in December 2006, Thornton notes. But what LBO'd company doesn't show negative operating income? In this case, that was due not only to interest on the buyout debt but also due to a write-down of intangible assets, which Thornton said "didn't help," implying that the accounting treatment of these came as a blow to Freescale's private equity owners, the Blackstone Group LP, the Carlyle Group, TPG and Permira Advisers LLP. And she says Freescale's CEO "explained away the paper losses," suggesting that this was disingenuous. The picture she paints is dire: "Given its huge interest payment, Freescale is having a hard time scraping up the $1.2 billion for R&D and $400 million for capital expenditures it needs each year to remain competitive," the story frets. R&D was cut to $1.13 billion, we later learn. Some slash. Amazingly, there is no mention in the story of of cash flows, which tell a very different story. Dig just a few pages into Freescale's recent 10-K (on page 38), and you find that it had $1.525 billion in adjusted Ebitda last year. (The adjustment includes that $891 million in noncash charges related to "purchase accounting adjustments.") Cash interest expense was just $760 million, and cap ex was $327 million. That left $442 million in free cash flow, after interest, cap ex and R&D. Freescale ended 2007 with slightly more cash on its balance sheet than it had a year earlier: $751 million versus $710 million. Freescale may have its problems, but BusinessWeek's misreading of the financials was a lot uglier than this buyout. - John E. Morris and David Carey See story from BusinessWeek CategoriesComments
From: Peter,
If you dig a bit further in Freescale's 10-K, you'll see that the company generated only $208 million of cash flow from operations, prior to changes in net working capital (cash "generated" through fluctuations in working capital can be volatile, depending on growth of the company, and thus is often not considered core cash generation). Against this $208 million of cash generated through its basic operations, Freescale had $327 million of capital expenditures. Thus, the company was not able to generate enough cash from earnings to cover its capex. In the full year following the buyout, revenue declined by 10% against a 5.4% decline in R&D spending, the life blood of any semiconductor company. BusinessWeek may not be so off the mark in highlighting concerns about weaker cash generation and declining revenue amidst a softening economic environment and its troubled largest customer.
Posted on:
April 10, 2008 4:45 PM
From: Guest,
Why does it surprise you that an author exaggerates the facts or ignores the opposing arguments? Emily Thornton wanted to write a negative article, just like you wanted to write a positive one. So you want to focus on adjusted EBITDA? The comparable figure for 2006 is not included in Freescale’s 10-K (hmm… why is that?), but reporters like you, who would never misread financials, are probably familiar with Freescale’s S-4 filed on June 22nd. In it they disclose that LTM adjusted EBITDA as of March 31, 2007 was $1,752 million (page 25). So LTM adjusted EBITDA has declined by 13% over the last 9 months.
Posted on:
April 10, 2008 6:54 PM
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Beg to differ on the above comments. How can these two PE shrills look past the fact that one-third of Freescale's business is likely to go away in the next twelve to eighteen months. The PE group simply made a bad bet on this terribly mis-managed company and Goldman Sachs along with Michel Mayer came out on tops. Period.