Intel-Tower Semiconductor Acquisition Falls Through

Intel Corp. and Tower Semiconductor Ltd. have decided to abandon their planned acquisition as Intel failed to obtain the necessary regulatory clearances on time. The news sparked a decline in both companies' shares, but the reaction among Wall Street analysts has been subdued.

Late on Tuesday, reports emerged that the deal had collapsed due to Intel's failure to secure approval from China before the August 15 deadline. A formal announcement was made early Wednesday, revealing that the deal was officially off. As part of the termination agreement, Intel will pay Tower Semiconductor a termination fee totaling $353 million.

The proposed acquisition, first announced on February 14, 2022, involved Intel purchasing Tower Semiconductor for $5.4 billion. However, market experts were far from enthusiastic about the deal. Analysts were concerned that Tower's low-margin chip-making capacity would further burden Intel's already declining margins. This unease predates the current chip shortage, which flipped from a scarcity to a surplus due to the COVID-19 pandemic. The situation was worsened by persistent disruptions in the global supply chain. Moreover, the recent passage of over $50 billion in funding specifically for domestic chip production further complicated the landscape.

Stacy Rasgon, an analyst from Bernstein, was not surprised by the development. Rasgon pointed out that Tower Semiconductor's stock closed on Tuesday at a price almost identical to its value prior to the announcement of the deal in February 2022 and significantly below the originally agreed cash deal price of $53.

Following the announcement, the shares of Intel fell by 3% while the PHLX Semiconductor Index experienced a decline of 1.5%, and the S&P 500 slipped by just 0.2%.

Tower Semiconductor's stock closed at $33.78 on Tuesday but dropped nearly 12% to a low of $29.86 during Wednesday's trading session. Over the past year, the stock has fallen by more than 35%. In comparison, Intel's shares have seen a decline of almost 7% during the same period, while the SOX index has recorded gains of 15%.

Overall, the termination of the Intel-Tower Semiconductor acquisition has had a notable impact on both chip companies' stock values but did not come as a significant surprise to industry analysts.

Intel's Failed Deal with Tower Remains a Setback for Foundry Efforts

The spread between Intel and Tower shares has widened throughout the year, reaching its widest gap since the deal was proposed. As a result, the failed deal does not come as a shock to industry observers. Despite this, the outcome is seen as modestly disappointing for Intel's foundry efforts.

Tower, a small player in the foundry industry with under $2 billion in revenue and a market share of around 1%, was unlikely to significantly contribute to Intel's business due to its lack of scale. However, the acquisition would have provided Intel with valuable expertise in running a foundry, along with trailing node/specialty expertise. Additionally, Tower's facilities in Israel, the U.S., Italy, and Japan would have given Intel a footprint for lagging edge production.

While Intel's foundry efforts have always been challenging, the absence of the Tower acquisition may make the situation even more difficult. Mizuho desk analyst Jordan Klein questions the significance of the deal coming to an end. He mentions that no one he has spoken to owns Intel for its foundry business, particularly in the more lagging-edge nodes where Tower excelled.

Intel's foundry business plays a crucial role in monetizing the substantial capital investment required to keep up with competitors like AMD. By doing so, it ensures that Intel's chip roadmap in server/AI remains relevant in key parts of the market.

In conclusion, while the failed deal with Tower may not be surprising, it does present challenges for Intel's foundry efforts. The acquisition would have provided valuable expertise and a presence in lagging-edge production. Nonetheless, Intel will need to navigate the industry dynamics and capital investment to maintain its competitiveness in the market.