CurrentOfferings.com Story:

Freescale IPO To Set Sail In Rough Waters

By James Detar, Investor's Business Daily, July 15, 2004

Motorola can't seem to get a break.

The company on Friday is expected to spin off its chip unit � now called Freescale Semiconductor (FSL) � in an initial public offering. The unit lost money three years in a row, and some see it as an albatross around Motorola's (MOT) neck.

But Motorola's under fire for the timing of the IPO. The chip industry is in the doldrums right now, with Intel (INTC) and others reporting problems. Merrill Lynch on Monday downgraded the chip sector, a move that hammered the tech-heavy Nasdaq index.

That doesn't provide much incentive to snap up Freescale shares. And Freescale's track record isn't likely to inspire investors, some analysts say.

"Why do I think Freescale is a bad investment? First, they haven't been able to sustain a profit," said analyst Jeffrey Hirschkorn, an IPO analyst for Current Offerings in Orlando, Fla. "At the same time, tech is now starting to get into a bad pattern. Bellwether companies are reporting. Intel is one, and it has profit margin problems."

So Freescale could be in for some rough sailing, he says.

Freescale's IPO is expected to price Thursday night and begin trading Friday. It could fetch between $17.50 and $19.50 a share. That would raise more than $2 billion for Motorola.

On the bright side, Austin, Texas-based Freescale has a reputation for high-quality technology. And though it hasn't posted an annual profit in recent years, it did make money in its last two quarters.

As part of Motorola, Freescale went by Semiconductor Products Sector, or SPS. It had net sales of $1.4 billion in the first quarter, up 21% from a year ago. SPS made a $98 million profit in the fourth quarter of last year and earned $104 million in the first quarter.

Freescale mainly makes small chips called microcontrollers. They go into cell phones, consumer goods and other devices. From 1997 to 2003, the Motorola unit sold more than $20 billion worth of chips, says research firm Gartner. By its own estimate, Freescale shipped about 5 billion chips over that period.

Parent Motorola accounted for 26% of its first-quarter 2004 sales. Freescale also counts Hewlett-Packard, (HPQ) Siemens (SI) and auto parts maker Visteon (VC) among its 10,000 customers.

After the company starts trading, Motorola will still own 70% of Free-scale. Motorola plans to sell off most of that stock by the end of this year. For now, Motorola's heavy stake could keep some investors away, Hirschkorn says.

"Why should I buy Freescale now when I can still buy Motorola? It will be on Motorola's books," he said. "I'd rather buy Motorola than buy Freescale and get into a bind."

Davis Willis, a Meta Group analyst in Dallas, agrees to a point. But the IPO is at least a step toward independence, he says.

"This is about Motorola providing a measure of independence and allowing it to be free," Willis said.

Still, he says, there are several questions that Freescale must answer before he will give it a thumbs up.

Having good technology isn't enough, Willis says. It may take time for that technology to mature. "The question is, is it too early?" he said. "Will the market adopt it in time?"

Freescale is putting a lot of research money into a new product line called ultrawide band. UWB is one of several competing broadband digital technologies. It can carry a lot more data than today's standard connecting wires.

"UWB will go into the home, to do things like connect audio equipment," Willis said. "It will tie into home networking, pushing multimedia around (room to room) in the home."

The catch? It will be two years before UWB products start to ship in high volumes, Willis says.

Freescale gains a lot from splitting with its parent, says iSuppli analyst Len Jelinek in El Segundo, Calif. "It's a great idea to separate the division outside Motorola," he said. "That way, Freescale can focus."

The fact that Freescale sold so many of its parts to its parent company may have limited its profit, says Jelinek.

Imagine a cell phone chip costs 10 cents to build, he says. The parent firm can force the chipmaker to sell it within the company for 12 cents, Jelinek says. But in the open market, the chip may fetch 15 cents.

Jelinek agrees that the chip market is in turmoil. Unlike others, he's generally bullish on Freescale.

"We're banking on the fact Free-scale will be viable and profitable," he said.