- Summary: Following Kohlberg Kravis Roberts & Co.'s huge deal last week for its investment in a proposed $21 billion buyout of hospital giant HCA Inc., KKR is said to have won a "brutal" auction bid with Silver Lake Partners for Philips Electronics NV's semiconductor division. The deal is believed to be worth more than €8 billion ($10.25 billion). Philips is one of the largest chip makers in the world and previously said it would consider an IPO for its semiconductor unit. The environment for private-equity deals shows signs of shifting as debt-market investors are becoming more conservative, yet private-equity firms are feeling pressure to find targets for their big war chests. A lawyer who represented an unsuccessful group in the auction said the bidding "was brutal" and as the bids went higher, "everyone lowered their expectations on returns." The lawyer also said private-equity firms are "really stretching now" to do deals. Another sign of change from this deal is the fact that private-equity firms usually prefer investments with stable cash flows given the often large amount of debt involved. However, chip makers' cash flows are anything but steady due to the competitive nature and volatility of the business.
Comment on related stocks/ETFs: Philips (NYSE:PHG) trades in the U.S. as an ADR listed on the NYSE. SeekingAlpha founder David Jackson commented early last week on the Philips auction:
"Private equity firms seem to be doing extremely well; just look at the Hertz numbers. But the deals are getting larger and larger, and if the market goes into a prolonged downturn, the private equity firms will be left holding a lot of, well, private equity. In the meantime, this sort of deal helps put a floor beneath publicly-traded equity prices."