TPG to Team Up With Motorola For Tech Mega-Deal –

In spite of the slew of buyout funds recently launched that will target the technology sector, the first major prize from this niche likely will be pulled in by a firm known more for its turnaround plays as Texas Pacific Group last week clinched a deal to acquire the semiconductor components division of Motorola Inc. for $1.6 billion.

The deal, the biggest ever for TPG and the largest buyout to date of a tech company, would have seemed like fertile ground for groups such as Silver Lake Partners, which will target divisions of publicly traded technology companies. Sources said the group’s fund, which sports a $1 billion target, already has met with between $3 billion and $4 billion in interest and likely will close next month on $2.25 billion.

Under the terms of the transaction, which was structured as a recapitalization, TPG will contribute approximately $350 million in equity, with Chase Manhattan Bank providing $1.2 billion in senior and high-yield debt. Lehman Brothers Holdings and DLJ Securities Corp. will be co-managers for the financing. In addition, Motorola will retain a 10% stake in the new company.

TPG will have the right to use the Motorola name for a limited time to ensure a smooth customer transition.

Although the deal was announced May 11, the news broke a day early when a group of former Motorola managers announced their own unsolicited $1.6 billion bid for the unit. According to a source at TPG, executives at Motorola did not consider the counter offer credible.

Low-Tech Attractions

TPG’s relationship with Motorola began in November when David Stanton, a partner in the firm’s San Francisco office, approached Motorola about the possibility of spinning out the company’s semiconductor components group. The group makes low-end, “discrete” semiconductors and analog units that are used in consumer products. Whereas high-tech semiconductors, made by the likes of Intel Corp., are sold for around $100 a unit, the units produced by the Motorola division go for several cents per unit, Mr. Stanton said.

Mr. Stanton described the division’s growth prospects as “in the high single digits, at best,” which he said was attractive to a financial buyer, because a firm is more concerned with steady cash flow than growth, but not “sexy” enough for a publicly listed high-tech company like Motorola.

The Motorola division, based in Phoenix, Ariz., has 10,000 employees and 1998 sales of about $1.5 billion.

Dipanjan Deb, a TPG principal, said consumer electronic giants such as Philips Electronics N.V. and Siemens AG also were seeking to divest themselves of similar divisions.

Mr. Stanton joined TPG in 1994 to head up its then-nascent technology team. Since 1996, the firm has acquired six technology companies, including two other semiconductor makers-GlobeSpan and Zilog Inc. GlobeSpan currently is in filing for an initial public offering, which, if completed successfully, could bring TPG a 20-times return on its investment, according to Mr. Stanton.

Last year, the firm paid $440 million to acquire the troubled Zilog. Mr. Stanton said the company is returning to profitability steadily, posting first quarter EBITDA north of $9 million after earning approximately half that a year ago.

In spite of TPG’s initial success with technology, not everyone in the buyout community is convinced this sector is an auspicious place to be. One limited partner in TPG’s current fund, who declined to speak on the record, said that while his group saw technology becoming more important in the economy, it nevertheless was taking a cautious approach toward investing in buyouts in that sector. “There’s a reason why people haven’t done [technology buyouts] much,” he said, adding that it was difficult to ascertain the health of individual companies within a particular tech sector.