China does Intel a small favor

Tower Semiconductor

17/08/2023 01:16

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Jonathan Guilford
       NEW YORK, Aug 16 (Reuters Breakingviews) - Intel
 INTC.O  can thank China later. The chipmaker on Wednesday
terminated its $5.4 billion acquisition of Tower Semiconductor
 TSEM.TA , after failing to secure approval from the country’s
State Administration for Market Regulation. Beijing’s
trustbusters are providing a helpful escape route from the
intensifying technology trade war.
    There was concern about the deal’s fate when it was agreed
back in February 2022. A breakup fee equal to 6.5% of the
transaction’s value, or about $350 million, attests to the
uncertainty. Chinese regulators have, sometimes fatally,
slow-rolled international mergers, most famously Qualcomm’s
 QCOM.O  $44 billion bid for NXP Semiconductors  NXPI.O .
Tower’s shares never traded close to Intel’s offer price. 
Adding Tower would have helped Intel boss Pat Gelsinger with his
strategic pivot to making semiconductors designed by others. The
$140 billion company’s previous push into the business failed,
and Tower’s management are experts. Tower uses old technology,
however, while Intel’s new customers, including the U.S.
Department of Defense and Qualcomm, want cutting-edge
fabrication. Intel’s challenge, above all, is to recapture the
state-of-the-art. 
    Also worrisome is that Tower’s gross margin lags Intel’s,
and dips in profitability tend to hurt the buyer’s stock price.
Tower’s revenue is expected to fall 15% this year, according to
estimates gathered by Refinitiv. The deal’s rationale looked
questionable, and a prolonged review provided a helpful out. 
    Roadblocks in China might only worsen. Washington is
curtailing the country’s access to advanced semiconductor
technology, as well as outbound investment there; the antitrust
regulator is responding by trying to wring concessions from
multinational companies, the Wall Street Journal reported. 
    Such tactics heighten the dangers for sellers. The 15-month
delay in MaxLinear’s  MXL.O  $4 billion purchase of Taiwanese
peer Silicon Motion Technology  SIMO.O  allowed time for severe
declines at both chipmakers to occur; despite finally obtaining
approval, MaxLinear moved to abort anyway, citing a material
adverse change in its quarry’s business. 
    The effect can work the other way, too. Cisco Systems
 CSCO.O  was forced to increase its $2.6 billion offer for
Acacia Communications to $4.5 billion when their merger
agreement expired after waiting nearly two years for China’s
SAMR. With some chipmakers wobbling amid trade sanctions and
economic instability, though, a tougher Beijing means sellers
will have to seek even stronger deal protections while buyers
will be more inclined to rethink their M&A strategies. 
    Follow @JMAGuilford on Twitter
    
    CONTEXT NEWS
    Chipmaker Intel said on Aug. 16 that it had mutually agreed
to terminate its $5.4 billion acquisition of Tower
Semiconductor, owing to an inability to secure regulatory
approval before their merger agreement expired. Intel will pay a
$353 million termination fee to Tower. 

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Graphic: Tower Semiconductor investors always had doubts    https://tmsnrt.rs/44eAxH4
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 (Editing by Jeffrey Goldfarb and Sharon Lam)
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