Freescale Getting Out of Mobile Chip Market Amid Financial Troubles

Posted by: Cliff Edwards on October 2, 2008

Chipmaker Freescale Semiconductor has had its fill of the mobile-phone chip business.

The privately-held company says in a statement that it is doing the dreaded “sharpening of strategic focus” by looking for a buyer or joint partner in its handset business. The news probably shouldn’t come as a surprise: one of the company’s biggest customers has been its former parent, Motorola. That company’s handset business has fallen on hard times after a series of missteps in product and marketing follow-ons to the hit Razr lineup.

Though a private equity group acquired Freescale in 2006, the company still must report earnings and major changes because of its rating and huge debt overhang. The company’s long-term debt stands at $9.3 billion, while half its $14.6 billion asset base is listed as goodwill and intangibles. As of early July, the company had just $1.2 billion in cash and equivalents.

With the recent economic turmoil and virtual freezing of the credit markets, the company could be hard-pressed to come up with cash to satisfy short-term needs. Chip companies burn through cash at a steady rate; Freescale had just $65 million in free cash flow provided by operations as of July, down sharply from $474 million a quarter earlier.

A source close to the company denied the company is experiencing a cash squeeze and suggested it has an untapped revolving line of credit it could turn to in a dire situation. A company spokesman was not immediately available for comment.

Freescale CEO Rich Beyer has been working to hone the company’s focus since taking the helm six months ago. In June, Freescale spun out a money-losing unit that is developing a new type of memory chip. Beyer has said he would look at all aspects of the operations to focus only on those with the best long-term profit and growth potential.

In seeking to jettison the cellular chip operation, the company is giving up one of its most-known businesses. Despite analyst projections that long-term growth in the cellular industry will be phenomenal as more people in developing company use only mobile devices to communicate, Beyer says now is the time to get out as teh chipmaker focuses on areas where it has leading market share.

“In the cellular handset chipset market, it has become evident that this business needs considerably greater scale in order to achieve a position of market leadership and long-term success,” he said in a statement. “We feel the investment required to achieve that scale by Freescale will be better served extending our product portfolios where we are the leader and expanding our application expertise in sensors, analog, power and multimedia processing.”

The company says it will increase its investments in sensors and other chip technologies used in the automotive sector and consumer networking. Freescale has a leading position in the microcontroller market that has helped improve fuel efficiency and exhaust emissions. Supplying chips into the automotive market could be trying short-term, however, given an increasing drop-off in new car sales.

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Bloomberg Businessweek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, and Douglas MacMillan, dig behind the headlines to analyze what’s really happening throughout the world of technology. Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

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