Intel’s $5.4bn purchase of Tower Semiconductor leaves markets lukewarm

Intel has agreed to acquire Tower Semiconductor Ltd for about $5.4 billion (€4.75 billion), part of chief executive Pat Gelsinger’s push into the outsourced chip-manufacturing business.

Intel will pay $53 per share in cash for Tower, according to a statement on Tuesday. The companies’ boards have approved the transaction, which they expect will close in about 12 months.

Shares of Tower rose 36 per cent in Tel Aviv on Tuesday. Intel shares fell less than 1 per cent in New York as the market opened, with analysts taking a tepid view of the deal.

Gelsinger, who took the CEO job a year ago, is betting he can compete with Taiwan Semiconductor Manufacturing Company (TSMC) in the chip-foundry market – the contract manufacturing of semiconductors for other companies. His comeback plan for Intel involves modernising its factories and building new ones aimed at restoring its leadership in chip technology.

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With Tower, Intel is acquiring customers and expertise. The chip-foundry industry requires experience in handling different types of chips and designs. Intel has previously had little success in that area because of a lack of commitment to it, Gelsinger has said. Intel’s factories have historically produced only its own designs.

Customer base

Tower makes power management chips, image sensors and a variety of other semiconductors. Its customers include Analog Devices and Broadcom, according to data compiled by Bloomberg.

What the move doesn’t provide is scale. Tower had annual sales of about $1.3 billion last year, a fraction of TSMC’s $56 billion.

Analysts at KeyBanc Capital Markets called the deal “moderately positive” for Intel. Since Taiwan Semiconductor is a specialty foundry, it’s unclear whether the acquisition will help Intel expand to the same volumes and compete with Samsung and TSMC on mainstream process technologies.

TSMC’s sales are expected to grow about 27 per cent in 2022, according to data compiled by Bloomberg. The Hsinchu-based company, which pioneered the market, accounts for more than 50 per cent of industry revenue and makes chips for many of Intel’s key rivals, a list that includes Advanced Micro Devices and Nvidia.

Tower, which is based in northern Israel, was formed from the combination of other companies’ plants, starting in the 1990s. It also owns a factory in Texas. It is similar to, but much smaller than, GlobalFoundries, a US-based chip manufacturer that Intel considered making a bid for last year. A deal never materialized and GlobalFoundries’ owner, Mubadala Investment proceeded with an initial public offering of the company last October.

Military contracts

On a conference call with analysts to discuss the deal, Gelsinger said Tower complemented Intel’s military contracts. Intel also plans to build on Tower’s existing partnership with STMicroelectronics, Gelsinger said.

The Tower deal is just part of Gelsinger’s plan to get Intel back on track. He’s also building a factory in Ohio that could cost $20 billion and new facilities in Europe. The spending spree is weighing on Intel’s profit margins and has put investors on edge.

The company’s earnings missed analysts’ projections last quarter, and it gave a disappointing outlook. But Intel has said that profit margins could be back to their historically high levels within five years.

Gelsinger also is seeking government funding to rebuild manufacturing in the US and Europe, arguing that too much of the industry’s production has shifted to Asia.

“This is a big investment cycle for us as a company,” he said in an interview following the earnings report last month. “It is the right one for Intel – it is a critical one for our industry and for our nation.” – Bloomberg