Silver Lake CEO on real vs. ‘perceived’ risk

Jim Davidson recently told PEI how semiconductor company Avago in four years went from an LBO critics thought was doomed to an award-winning IPO.

Semiconductor company Avago generated a lot of attention last year because Silver Lake Partners – along with Avago’s co-sponsor, Kohlberg Kravis Roberts – effectively renewed the hopes of many a GP that the IPO market was thawing when it successfully floated the company. It was also the exact opposite result of what many onlookers expected when Silver Lake and KKR bought the business in 2005, Jim Davidson, Silver Lake's co-founder and co-chief executive, told PEI in a rare interview.

PEI subscribers may read the full interview here.

It was a business in the wrong place.

Jim Davidson

Listed in August on the Nasdaq exchange, the Avago IPO was one of the largest recorded in the US last year; it priced at the top of its range, selling 43.2 million shares to raise a total of $648 million, and valuing the company at $3.5 billion. The stock closed up nearly 8 percent on its first day of trading, pushing the company’s valuation to $3.8 billion.

The investor group, which bought Avago in 2005 for a reported $2.7 billion, sold nearly 22 million shares worth a total of about $326 million in the IPO. The partial exit won North American private equity exit of the year honours in the PEI Awards 2009. In early 2010, the group further exited the company by selling $435 million-worth of shares in a secondary offering.

Davidson: proving critics wrong

Avago, originally the semiconductor business of Hewlett Packard, is an interesting case study in part because many industry observers expected the deal to fail when the investment was made near the end of 2005.

It demonstrates that Silver Lake’s “expertise around technology allows us to differentiate between perceived risk and real risk”, Davidson told PEI.

While part of HP, and later Agilent, the semiconductor business had sunk hundreds of millions into R&D and had invented an array of very advanced technologies, but the business had continually been questioned by its corporate parent because it was deemed too cash-intensive and was not reporting large profits.

“That did not mean it was a bad business, it just meant that it was a business in the wrong place,” Davidson said.

When Silver Lake purchased the company, it had trouble raising the bond segment of its financing for the deal. A group of potential bond purchasers approached Silver Lake under an NDA and standstill agreement to hold a conference call, during which the firm explained that Avago, under private equity ownership, was really a portfolio of assets.

Six hours later, the bond deal was done, with 70 percent of the purchases made by individuals participating on the call, Davidson recalls. Within three months, Avago went on to sell several of its businesses, which had been generating around $18 million to $20 million in EBITDA, to strategic buyers. “Four months later Avago had no bank debt. The bonds were now the most senior debt in the company and the strategic sales netted about $730 million in cash. But what was most important about restructuring Avago’s business lines was that we had a much more focused company.”

That focus intensified, with improvement in the business’ growth, balance sheet and business processes up until the IPO, which Davidson notes, crucially, was an IPO in which stock investors could make money. At press time, Avago shares were trading up roughly 46 percent from their offering price.

“I hope that is what we are known for, because we like to be affiliated with high quality companies that are still growing,” Davidson says. “We are fiduciaries for our limited partners’ capital but we are also trying to be stewards of the companies themselves as they continue to perform well even after capital has been returned to our investor base.”

PEI subscribers may read the full interview with Davidson – in which he discusses how Silver Lake has managed through the downturn, its relationship with LPs, the launch of a credit division, the blockbuster LBO of Skype, and much more – by clicking here.