MEMC Electronic Materials
In August 2001, John Marren, a partner with Texas Pacific Group (TPG), was walking from his office to the firm’s partner meeting to make a presentation and discuss a potential investment in Monsanto Electronics Materials Company (MEMC, NYSE: WFR). MEMC was the largest American, and fourth largest worldwide, manufacturer of silicon wafers used in the production of semiconductor devices. The previous month had marked another decline in what was turning out to be the worst year ever for the semiconductor industry. For the quarter ending September 30, 2001, MEMC expected to have an annualized EBITDA loss of approximately $80 million, down from an annualized EBITDA profit of $180 million only six months earlier. The industry downturn, mounting operating losses, and $1.1 billion of debt drove MEMC’s share price from a high of $24 in March 2000 down to approximately $1 just a year and a half later. TPG had been negotiating with MEMC’s parent, E.ON, the largest German utility, to acquire its 72 percent common equity interest in MEMC (50 million shares), as well as MEMC debt held by E.ON with a face value of $900 million. Weary after eight months of negotiations with E.ON and debating with his partners the merits of investing in MEMC, Marren opened the door to the conference room still pondering the questions he knew his partners would have: • Why should TPG consider an investment in a business that was: (i) highly cyclical, (ii) highly capital intensive, and (iii) hemorrhaging cash? • What was the least amount TPG could offer to E.ON to acquire its debt and equity securities in MEMC? • Would MEMC be worth more to TPG than to E.ON? • If TPG were successful in acquiring MEMC, what should be done both to restructure the balance sheet and to fund MEMC’s ongoing operations?