Intel’s Terminated $5.4B Tower Acquisition: 5 Big Things To Know

The termination of Intel’s $5.4 billion deal to acquire Tower Semiconductor is a setback for Intel Foundry Services, the company’s nascent but growing contract chip-making business, because the semiconductor giant had viewed the acquisition as a way to ‘significantly’ advance its plan to manufacture chips for other companies. CRN lays out how this will impact Intel.

Intel CEO Pat Gelsinger

Intel suffered a setback for a key part of CEO Pat Gelsinger’s comeback plan on Wednesday when the semiconductor giant announced the termination of its $5.4 billion deal to acquire Israeli chipmaker Tower Semiconductor.

In an early Wednesday announcement, the Santa Clara, Calif.-based company said it was walking away from the deal because it was unable to receive the necessary regulatory approvals required by its merger agreement, which was announced more than a year ago on Feb. 15, 2022.

The termination of the deal will serve as a blow to Intel Foundry Services, the company’s nascent but growing contract chip-making business, because the semiconductor giant had viewed the Tower acquisition as a way to “significantly” advance its plan to manufacture chips for other companies.

The move to build a contract manufacturing business that competes with Asian foundry giants TSMC and Samsung Electronics plus smaller companies is key to Pat Gelsinger’s plan to revitalize the American chipmaker as part of his IDM 2.0 strategy. The strategy is an evolution of the company’s integrated device manufacturing model where it fabricates the chips it designs.

Despite the deal falling through, Gelsinger reiterated in a Wednesday statement that Intel’s foundry efforts “are critical to unlocking the full potential of IDM 2.0” and added that the company continues “to drive forward on all facets of our strategy.”

“We are executing well on our road map to regain transistor performance and power performance leadership by 2025, building momentum with customers and the broader ecosystem and investing to deliver the geographically diverse and resilient manufacturing footprint the world needs,” he said.

What follows are five important things to know about Intel’s terminated $5.4 billion Tower acquisition and how it will impact Intel Foundry Services as well as the company’s IDM 2.0 strategy.

Why Intel Terminated The Deal And The Termination Fee

Intel said it terminated the Tower Semiconductor deal because it was unable to “obtain in a timely manner the regulatory approvals required under the merger agreement.”

The company announced the termination a day after the deadline it had set with Tower to complete the acquisition under the original agreement.

While the company didn’t say which regulatory authorities had yet to approve the deal, Bloomberg reported that Chinese authorities did not give approval by Intel and Tower’s deadline.

As a result of the deal’s termination, Intel is paying a $353 million fee to Tower.

China had been a holdout on the acquisition for months, which had caused Intel to extend the timeline for the deal’s estimated completion after initially saying it would close around February of this year.

The deal is likely a casualty of ongoing geopolitical tensions between China and the United States, which has ramped up export restrictions against the Asian country in recent years to hamper its ability to make advanced chips over fears that China would use them to build state-of-the-art military technologies.

How Wall Street Is Reacting To The Terminated Deal

Intel’s stock price was down nearly 2 percent to $34.10 per share close to 12 p.m. EDT Wednesday, several hours after the company announced the termination of the Tower Semiconductor deal.

Shares for Tower, on the other hand, suffered greater, sinking by nearly 8.5 percent to $30.94 per share around the same time in reaction to the news.

Bloomberg noted that investors were already skeptical about the deal completing before the termination announcement in light of China’s ongoing reluctance to approve it. As a result, Tower’s stock price had already suffered before Intel killed the deal, having declined by 22 percent year to date as of Tuesday.

This brought Tower’s stock price to $33.52 per share on Tuesday, well below the $53 per share Intel planned to pay the company as part of the acquisition deal.

What Intel Hoped To Get From Tower

By acquiring Tower, Intel would have been able to expand its global manufacturing capacity and gain an existing base of customers for its revitalized contract chip-making business, Intel Foundry Services.

Founded in 1993, Tower manufactures “analog integrated circuits for more than 300 customers worldwide in growing markets such as automotive, medical, industrial, consumer and aerospace and defense, among others, according to the company’s website.

Tower brought in $1.68 billion in revenue last year, an 11 percent increase from 2021. This would have given a significant boost to Intel Foundry Services, which grew 14 percent to $895 million in revenue last year, a tiny percentage of Intel’s $63.1 billion in total revenue for 2022.

The Israeli company’s portfolio of specialty chip technologies, such as radio frequency, power, silicon-germanium and industrial sensors, would have complemented Intel’s own set of technologies that are focused on optimizing performance and efficiency for higher-end chips such as CPUs.

Tower’s network of chip manufacturing plants in Israel, Italy and the U.S. would have also allowed Intel to expand its global base of factories, also known as fabs.

“Tower’s specialty technology portfolio, geographic reach, deep customer relationships and services-first operations will help scale Intel’s foundry services and advance our goal of becoming a major provider of foundry capacity globally,” Gelsinger said when Intel announced the Tower deal early last year.

Analysts have previously said that Tower’s management team would have given Intel Foundry Services a wealth of experience and expertise in running a contract chip manufacturing business.

How Intel Foundry Services Is Faring

When Intel announced the termination of the Tower deal, the company said its revitalized contract manufacturing chip business, Intel Foundry Services, has made “significant strides over the past year.”

The semiconductor giant said Intel Foundry Services revenue grew more than 300 percent to $232 million in the second quarter and that the business has been boosted by recent deals and partnerships.

These deals included a recent agreement with Synopsys to “develop a portfolio of intellectual property” based on the Intel 3 and Intel 18A processor nodes as well as a multi-generation agreement with Arm “to enable chip designers to build low-power compute system-on-chips” on Intel 18A.

Intel has also struck a strategic partnership with Taiwanese chip designer MediaTek to use its advanced process technologies to manufacture future products.

Despite the termination of the Tower acquisition, Intel said it still hopes to surpass Samsung Electronics, the second largest foundry in the world, in contract chip manufacturing revenue by 2030.

“Since its launch in 2021, Intel Foundry Services has gained traction with customers and partners, and we have made significant advancements toward our goal of becoming the second-largest global external foundry by the end of the decade,” said Stuart Pann, senior vice president and general manager of Intel Foundry Services, in a Wednesday statement.

How Intel Foundry Services Fits In With Gelsinger’s IDM 2.0 Strategy

Intel Foundry Services is a key part of Gelsinger’s IDM 2.0 strategy, a plan to evolve Intel’s integrated device manufacturing model that was announced shortly after he became CEO in early 2021.

Rather than just designing and manufacturing its own chips, the IDM 2.0 strategy calls for Intel to expand its global manufacturing capacity, use manufacturing processes from rival foundries such as TSMC when it will give Intel’s products a greater advantage and build Intel Foundry Services into a big business.

This means that Intel’s continued development of chip technologies will not only benefit the company’s own products such as CPUs and GPUs but also products from other companies that want Intel to manufacture those products through Intel Foundry Services.

“We are building a differentiated customer value proposition as the world’s first open system foundry, with the technology portfolio and manufacturing expertise that includes packaging, chiplet standards and software, going beyond traditional wafer manufacturing,” Pann said in a statement.

As a result, the success of the IDM 2.0 strategy hinges in large part on Intel’s ability to provide competitive chip technologies that meet the specifications of internal and external design teams.

To that end, Gelsinger said Intel is “executing well” on his plan for the company to surpass Asian foundry rivals TSMC and Samsung Electronics by regaining “transistor performance and power performance by 2025” after falling behind its top competitors for several years.

However, Intel will have to move forward with its IDM 2.0 strategy without Tower Semiconductor, which would have given Intel Foundry Services an important boost.