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Nec Electronic Case Study

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NEC Electronics
In early July 2007, Alp Ercil, Managing Partner and portfolio manager of Perry Capital’s (“Perry”)
Asian portfolio, was considering options for how best to manage the $150 million position his firm had in NEC Electronics (NECE), the semiconductor subsidiary of Japanese electronics conglomerate
NEC. In recent days, the NECE subsidiary had garnered Ercil’s full attention. On the heels of attending NECE’s annual meeting, he had learned that the Tokyo Stock Exchange (TSE) was placing
NECE on a watchlist for possible delisting due to its concentrated ownership structure. To Ercil, this was yet another sign that the investment was not going as planned - the stock was down considerably since Perry initiated the position in late 2005 (see Exhibit 1).
Ercil took a moment to reflect on the recent history with NECE. When Perry Capital made the initial investment in 2005, Ercil had every expectation for success. Ercil’s team felt that NECE’s microcontroller unit (“MCU”) business,1 which supplied chips to major automobile manufacturers, operated at a world-class level with high growth potential and solid margins. NECE’s Computing,
Consumer and Discrete businesses were generally competitive. However, the Communications business, which supplied semiconductors for mobile phones, appeared to be a constant drag on
NECE’s cash flow and earnings. Specifically, Perry believed that NECE could significantly improve its valuation by restructuring the Communications business and refocusing resources on the other businesses, including the MCU division. Numerous meetings with NECE management had left Ercil optimistic about the probability of a successful restructuring as the NECE management seemingly shared Perry’s vision for the future of the company.
More than a year after...

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