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Timing is everything for the chip chasers

So the deal is done: Freescale Semiconductor will be acquired by a private equity consortium in a transaction with a total value of just under €14 billion. The consortium is led by The Blackstone Group, and includes The Carlyle Group, Permira Funds, and Texas Pacific Group.

A couple of weeks ago, when equity companies started to encircle Freescale Semiconductor, it was interesting to hear the justifications on why they thought the company was worth the money. The financial facts are Freescale has about €1.6 billion in cash and generates around €520 million cash per annum, so it looks like a pretty good buy. However, what caught my attention was not the financial justification. Instead, it was the purchasers' predictions that the semiconductor industry is set fair to sail into a few good years of lucrative trading. But are they right?

According to Samsung's semiconductor division boss, they are, so to speak, on the money. Samsung says the DRAM business is on a roll, with the company forecasting record revenues during this quarter. It sees this profitable demand for DRAMs continuing into 2007, particularly with the expected launch of Microsoft's Windows Vista operating system coming early next year. The situation has prompted Samsung's president to suggest the global business for DRAMs could grow by 26% by the end of 2008.

But—and there is a but—a major U.S. chip maker is currently warning of a potential inventory build up with a Japanese wireless customer, which has put a slight dent in its third-quarter forecasts. This suggests sales of its chips for mobile phones may dip below the seasonal norm.

However, analyst iSuppli paints a different picture. Strong sales of personal computers have created very low inventory situations for DRAM manufacturers. Obviously, it's an indication that demand is strong for those devices.

But buyers beware. Evidence of a trend is building, one that was last experienced just prior to the biggest electronics market downturn ever: An increasing number of venture capitalists are keenly searching for projects to invest money in. This presents the temptation of easy money for some companies that believe they may well have a killer design project, but later find the product turns out to be a customer-free lemon. Too much of that scenario was a contributing factor to the 2000 electronics industry crash.

So who's right here? Time will tell. But right now, The Blackstone Group's view must be that the chips are definitely not down.

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