Freescales IPO Sputters on Worries of Chip Slowdown

Freescale Semiconductor cuts the price of its initial public offering to $13 a share as investors worry about a downturn as manufacturing capacity pulls ahead of demand.

Freescale Semiconductor Inc. suffered the first mauling of grumpy bears worried about a slowdown that a semiconductor industry organization says is due to arrive next year.

The Austin-based spinoff of Motorola Inc. cut the price of its IPO (initial public offering) to $13 a share, down from an estimate range of $17.50 to $19.50. The offering of 121.6 million shares of Freescale, the spinoff of Motorolas chip business, was worth $1.58 billion, down from what could have been worth as much as $2.37 billion.

In early afternoon trading Friday, Freescale was trading at $13.62; about 16.9 million shares traded hands.

Freescale appears to have been caught by a growing negative perception of the chip industry, caused by a mediocre earnings report from Intel Corp. that prompted worries of inventory corrections during the second half.

The Semiconductor Industry Association is already on record as saying that chip growth should begin to slow in 2005, ushering in a new down cycle in the semiconductor industry as manufacturing capacity begins to catch up with and outstrip demand.

At the ground level, attendees at this weeks Semicon West chip-manufacturing conference in Silicon Valley worried that the industry was heading into a bubble; the Philadelphia Stock Exchange semiconductor index has dropped about 14 percent in the two weeks following the end of June.

"Its been a tough market for semiconductor stocks over the past few weeks, so Freescales timing was difficult," said Christopher Caso, vice president of semiconductor research at Schwab Soundview Capital Markets, based in Jersey City, N.J.

"Weve had a general revaluation of the space over this time period, as some companies have began to temper their expectations for the September quarter, following a nine-month period when most companies had been exceeding expectations. Thats a difficult environment in which to bring a company public, hence the lower pricing for Freescales IPO. "

/zimages/2/28571.gifRead more here about predictions of a slowdown in 2005.

Intels earnings report on Tuesday faced an atmosphere that had already turned hostile. Analyst firms Morgan Stanley, Lehman Bros. and Deutsch Banc Securities Inc. all cut Intels third-quarter and second-half revenue estimates in advance of the call, citing reduced demand for personal computers or inventory concerns.

A report released Monday by Joe Osha, a semiconductor analyst with Merrill Lynch, added water to the fire. Osha downgraded the semiconductor sector from "overweight" to "underweight."

"We believe that theres an increasing risk that buyers of semiconductors will seek to keep inventories under control for the remainder of the year," Osha wrote. "Thats especially true now that some end-market segments, most notably the cellular handset business, are less likely to encounter undersupply conditions in the second half of the year.

"If inventory levels were to remain static for the remainder of the year, which is admittedly a pretty downbeat assumption, the result would be negative for our unit-growth target for 2004 as well as 2005. We believe that more modest inventory build assumptions could drive our unit-growth estimates from 19 percent this year and 10 percent in 2005 to 13 percent this year and 8 percent in 2005."

Intels report Tuesday confirmed analyst expectations. The company reported revenue and earnings that were flat when compared with the prior quarter. Although the chip makers outlook was positive, analysts were troubled by a sudden spike in inventories, more than half from the companys new 90-nanometer Prescott processor.

Intel said it would slow production for the second half of the year to try to let inventories dwindle, a move the company didnt make until the last weeks in June and with no warning to analysts.

"We looked at [the inventory levels] and decided it was time to make a change," Intel chief financial officer Andy Bryant told analysts during a conference call Monday. "Paul [Otellini, Intels president and chief operating officer] placed the order, and everyone started changing the build plans. With hindsight, I wish I could say I figured it out a month or so earlier."

Meanwhile, the Semiconductor Industry Association has repeatedly warned that the chip industry is due for another downturn. Although overshadowed by the war in Iraq and a fluttering domestic economy, the chip industry began to rebound from its disastrous 2001-02 dot-com bust in late 2003 and early 2004, with chip vendors beginning to report the sort of healthy revenues that investors had come to expect.

Since June, the SIA has lauded the healthy return of the chip industry, which has taken place a year earlier than expected. But the SIA also warned that chip revenues will grow only a measly 4.2 percent in 2005 to $223 billion and will decline by 0.8 percent in 2006 to $221 billion, the bottom of the next downturn.

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