Agilent Cashes in Its Chip Unit


By Justin Hibbard Private equity firms Kohlberg Kravis Roberts and Silver Lake Partners have won an auction to purchase the semiconductor-products business of Agilent Technologies (A) for $2.65 billion, according to a source close to the matter. Agilent may announce the sale as soon as Monday, when it reports fiscal third-quarter earnings.

In the final days of competitive bidding, KKR and Silver Lake edged out such rivals as Texas Pacific Group and Francisco Partners, which were unwilling or unable to beat the winning bidders' offer. Most analysts had expected the bid to reach $2.5 billion, but the $2.65 billion price is in line with the valuations of similar chip companies.

FURTHER SPIN-OFFS? The deal values Agilent's semiconductor business at 1.5 times trailing 12-month revenues, roughly the same multiple at which chipmakers Micron Technology (MU), Freescale Semiconductor (FSL), and Fairchild Semiconductor (FCS) are valued. "It seems like a fair price for all," says Richard Eastman, senior analyst at investment bank Robert W. Baird & Co. Agilent, KKR, and Silver Lake declined to comment.

The new owners will likely focus on developing Agilent's personal systems business, which sells chips for mobile phones, printers, PC peripherals, and consumer electronics. This unit accounted for two-thirds of Agilent semiconductor sales in 2003 and 2004. Chips that equip mobile phones with multimedia and high-speed Internet access are among the personal systems division's fastest-growing products. The semiconductor business has an agreement to supply printer chips to Hewlett Packard (HPQ), which spun off Agilent in an initial public offering in 1999 and accounted for 14% of the chip division's revenues last year.

Less certain is whether KKR and Silver Lake will keep the unit's networking business, which makes chips for fiber-optic equipment and computer-storage devices. "They might spin those products off to a company that wouldn't want to buy the whole division," says Mark Fitzgerald, an analyst at Banc of America Securities. In 2000, Agilent unveiled a much-heralded optical switching component right before the telecom industry entered a prolonged slump.

STILL BURDENED. The sale of the chip business could bring good news for long-suffering Agilent shareholders, who haven't seen the company's stock rise above its $30 IPO price in over a year. In a June report, analysts at investment bank Needham & Co. suggested that Agilent could use proceeds from a sale of its semiconductor division to boost its share price by buying back convertible bonds and shares. In the long run, the analysts predicted Agilent's growth, margins, and profitability would improve as management focused on the company's $2.9 billion test and measurement business.

The semiconductor business has been a drag on Agilent's profitability. After two years of losing money, the division last year turned a pretax profit of $166 million on $2 billion in sales -- a meager 8% operating profit margin. Shedding the unit will allow Agilent's more profitable test and measurement and life-sciences divisions to shine through.

But Agilent's results are still burdened by the company's semiconductor-testing arm, which last year turned in a 7% operating profit margin. Agilent CEO William P. Sullivan, who joined the company in March, has vowed to improve profits by fixing, restructuring, or exiting businesses. Could a sale of the chip-testing business be next? Hibbard is a correspondent for BusinessWeek in Silicon Valley


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