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Friday, September 01, 2006
New Name and Strategy for Chip Division at Philips

The semiconductor unit of Philips Electronics is adopting a new name, NXP, as it becomes a stand-alone company and pursues a strategy that relies heavily on supplying chips to the fast-growing consumer market for advanced electronics products.

NXP, being adopted today, stands for Next Experience, the company said. The new name is meant to suggest that the company will focus largely on chips to improve the performance of the next generation devices used by consumers, including digital televisions, multimedia cellphones, electronic passports and digital cash and identification systems.

Last month, Philips Electronics agreed to sell 80 percent of its semiconductor division to a group of private equity firms ? Kohlberg Kravis Roberts & Company, Silver Lake Partners and AlpInvest Partners ? for 3.4 billion euros ($4.35 billion). Two weeks ago, two other private equity firms, Bain Capital and Apax, joined the buyers? group.

As part of the deal, expected to close in the fourth quarter, the investors will take on 4 billion euros ($5.12 billion) of the new company?s debt. The company will be based in Eindhoven, the Netherlands.

The new name and the strategy, analysts say, bear the clear imprint of the chief executive of the new company, Frans van Houten. He spent eight years as a senior executive in the consumer electronics division of Philips before assuming control of the semiconductor business in 2004.

Mr. van Houten?s experience in consumer electronics, analysts say, shaped his view that the best future for Philips?s semiconductor unit would be to make chips for what he refers to as ?connected consumer devices?: products for entertainment, communication and commerce that typically can handle images and sound, and can share information with other devices.

The market for consumer device chips is growing faster than that of chips for the personal computer industry, which is maturing.

Mr. van Houten, 46, was often mentioned as the most likely successor to Gerard Kleisterlee, 59, the chief executive of Philips Electronics.

The Philips semiconductor business, analysts say, has been somewhat hamstrung inside the larger company. It was often trying to sell its chips to companies that compete with the consumer electronics business of the parent company, like Sony, Toshiba and Matsushita, which markets Panasonic products. These companies are understandably reluctant to forge close partnerships with a supplier that is an arm of a corporate rival.

As a separate company, NXP will no longer have to overcome that hurdle. Removing that barrier could lift sales by 25 percent or so over the next few years, estimates Richard Doherty, director of Envisioneering, a technology research firm.

With sales last year of 4.62 billion euros ($5.9 billion), the Philips semiconductor business was among the world?s top 10 chip makers. In the last two years, under Mr. van Houten, the business grew by 19 percent and moved from a loss to profitability, with a pretax profit of 307 million euros ($393 million) last year.

The semiconductor business requires sizable capital investments and in the past it has swung in unpredictable cycles. Mr. van Houten said he was intent on making the business less volatile, delivering steady growth and pretax profit margins in the range of 5 to 15 percent.

But the parent company decided it wanted to get out of the semiconductor business to focus on what it regards as its two core strengths: health care products, like medical imaging machines and defibrillators, and what it calls the lifestyle market, with offerings that range from electric shavers to flat-screen televisions.

Mr. Kleisterlee has said Philips plans to drop ?Electronics? from its corporate name.

In using XP as corporate shorthand for ?experience,? NXP is following the lead of another technology company, Microsoft. The version of its operating system introduced in 2001 is called Windows XP.

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