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Monday, September 11, 2006

If & After Freescale Gets Bought; Who Could Be Next in Tech?

This confirmed talk on the New York Times' piece regarding Freescale Semiconductor (FSL) propsed $16 Billion private equity buyout could make for an interesting day. Freescale has confirmed the talks, but there just aren't any details available currently other than the $16 Billion.

Shares of FSL are up 18% at $36.30 on this in early trading, and that gives it an implied $14.8 Billion market cap. As of June 30, FSL carried $3.1 Billion in current assets and had $7.6 Billion in total assets listed on its Balance Sheet; and it listed $2.759 Billion as total liabilities, $1.57 Billion of which were current and short-term liabilities.

Texas Pacific Group, Blackstone Group and Permira are said to be the main investors that would lead the buyout, but there are also reports that Carlyle Group and Bain Capital might join the group.

Kohlberg Kravis Roberts and Silver Lake Partners are said to be part of another set of investors trying to acquire Freescale, and that would be on the heels of this group paying out $8.2 Billion to Philips for an 80.1% stake in its chip unit. That company is said to be the #3 semiconductor make in Europe behind STMicro (STM) and Infineon (IFX). Keep in mind that Infineon is also trying to spin-off one of its units. Silver lake & KKR also still have parts of the Agilent Tech (A) chip business the group paid $2.7 billion for in the last year, although it has sold off some of the unit in seperate transactions to Marvell (MRVL) and PMC-Sierra (PMCS). If KKR & Silver Lake decide to pay up further they will end up with one massive chip conglomerate.

This proposed $16 Billion would eclipse the $11+ billion buyout of Sugard Data and the $2+ Billion buyout of Seagate Tech by Silver Lake, which then re-IPO'd under the ticker "STX."

Ironically, just under two years ago Motorola (MOT) was fighting to get rid of Freescale, and they even had to drastically lower their initial trading price to get interest from the street. Employees inside the company even called the company "Freefall" when asked about the company. Not many other chip companies can claim the same 125% gains in less than 2-years like freescale, so what a difference some time can make. That unit was the last tail of a longer-term restructuring plan in Motorola, and at one point was its own largest customer.

This even sets up an interesting tech environment when shares have been so weak. In our own ETF screen last Friday, it was shown that the Semiconductor HOLDRs (SMH) were among the top 4 Worst performers of all ETF's year-to-date.

Cramer on his MAD MONEY recently speculated that Broadcom (BRCM) and Western Digital (WDC) could be up for grabs. In recent internal screens in technology stocks we have found several decent-sized companies that could also be in the running to either be taken private or could be gobbled up by larger public technology predators. These are just some of the names (with current market caps provided):

-Emulex (ELX); $1.44 Billion

-Arrow Electronics (ARW); $3.3 Billion

-Advanced Semi (ASX); $4.3 Billion

-Teradyne (TER); $2.65 Billion

-On Semiconductor (ONNN); $1.9 Billion

-NetGear (NTGR); $602 million

-Qlogic (QLGC); $2.95 Billion.

These are just a portion of the names that have come under various screening names that have come up. There are literally dozens of other names in the sub-$1 Billion group. This list is also just an "ease of integration" list and does not include some of the recent and old turn-around or Stink, Inc. names like Juniper (JNPR) or 3Com (COMS).

The Freescale acquisition is obviously one of the largest of its kind, but it sure makes you wonder which names that other private equity consortiums and other large public tech companies will go after next.

Jon C. ogg
September 11, 2006

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