China Torpedoes Intel’s Bid for Israeli Chip Maker

HONG KONG— Intel scrapped its more-than-$5 billion offer to buy Israeli chip maker Tower Semiconductor after Chinese regulators failed to approve the deal, showing how U.S.-China technology tensions are disrupting strategic plans for some major American companies.

The demise of Intel’s deal for the Israeli chip maker comes as the Biden administration ratchets up pressure on China’s chip industry in an effort to curb its ambitions to develop strategic technologies. For Intel, the setback complicates CEO Pat Gelsinger’s turnaround efforts by, in part, increasing production of chips for other companies alongside Intel’s own products. Buying Tower Semiconductor was central to building that so-called “foundry” business.

The companies said early Wednesday that they walked away from their proposed deal after failing to win regulatory approval—Intel had warned the deal may fall through if regulatory approval wasn’t received by a Tuesday deadline.

Tower, which manufactures in its home country and other places around the world, was expected to handle contract production of older-generation chips, while Intel would build up its own contract chip-making business around its more advanced chip manufacturing. Intel aimed to better compete with Taiwan Semiconductor Manufacturing Co. , or TSMC, and other giants—both by winning over external customers and making self-designed chips in house.

With the deal’s collapse, “Intel will have to build all that stuff on their own, and that will be tough,” said Bernstein analyst Stacy Rasgon. “They just don’t have enough scale on their own to support investments they’d need to make.” The change will complicate Intel’s revamp effort, he said. “Foundry is a piece of the turnaround. It was going to be very difficult even with Tower.”

Intel shares closed down 3.6% on Wednesday to $33.53, while Tower Semiconductor’s stock fell about 11% to $30.17.

Intel posted its worst quarterly loss ever earlier this year—though it rebounded somewhat in the latest quarter—cut its dividend and is aiming to slash up to $10 billion in annual costs by 2025. The company became a Silicon Valley colossus in the 1980s and 1990s by making the central processing units that powered the PC revolution. It both designed circuits and made them in its own factories. Now, chip companies tend to specialize either in circuit design or manufacturing, and Intel hasn’t been able to pick up much business making chips designed by other people.

China’s State Administration for Market Regulation, whose signoff Intel and Tower had been waiting for, didn’t respond to a request for comment Wednesday.

The U.S. unveiled sweeping export controls on sharing American chip technology with China in October, and recently announced restrictions on investment in China’s chip sector.

Antitrust reviews have become a part of Beijing’s tool kit for hitting back at the U.S., with regulators slow-walking or failing to approve deals involving American companies that fall within its jurisdiction.

The Intel-Tower deal is the second big chip maker acquisition to be scuppered by Beijing: In 2018, as U.S.-China trade tensions were on the rise, Qualcomm scrapped its $44 billion purchase of Dutch chip maker NXP Semiconductors after it failed to gain Chinese approval by the deal’s deadline.

Among non-semiconductor deals, DuPont last year scrapped its $5.2 billion purchase of electronics-materials specialist Rogers because of a lack of Chinese regulatory clearance.

Citing national-security concerns, China in May banned certain local companies from procuring memory chips from U.S. chip giant Micron,

The Tower deal’s regulatory problem has spotlighted the particularly delicate spot Intel is in amid the U.S.-China technology fight. It does a lot of business in China, where many of the world’s chip-based devices are manufactured, but has also pushed to increase domestic chip production in the U.S. and championed greater government investment in American chip making.

“Intel’s ability to agree to any Chinese antitrust authority conditions around the deal was heavily constrained by a series of U.S. measures targeting China’s semiconductor industry,” said Paul Triolo, technology policy lead at consulting firm Albright Stonebridge Group in Washington, D.C. “Other mergers and acquisitions in front of China’s antitrust authorities in the semiconductor sector will be approved on their own merit, but the failure of the high profile deal shows how difficult the geopolitics around tech deals have become.”

Intel, which agreed to buy Tower in February 2022, said it would pay a $353 million termination fee to Tower, in line with the terms of their agreement.

Intel initially said it aimed to close the deal in the first quarter of this year, but then extended the expected timeline to the first half. The company said in April it might terminate the deal if regulatory approvals weren’t received by Aug. 15.

Intel’s Gelsinger flew to China in April and July pledging to improve relations with the Chinese tech community, and had meetings in China to reinforce the deal’s desired outcome, people familiar with the matter said.

“Our respect for Tower has only grown through this process, and we will continue to look for opportunities to work together in the future,” Gelsinger said in announcing the deal’s termination.

Tower separately confirmed the two sides would terminate the deal. “Tower was very excited to join Intel to enable Pat Gelsinger’s vision for Intel’s foundry business,” Tower CEO Russell Ellwanger said. The company ranked seventh among the global foundries by revenue in the first quarter, according to research firm TrendForce.

—Yoko Kubota in Beijing contributed to this article.

Write to Dan Strumpf at [email protected], Yang Jie at [email protected] and Sarah E. Needleman at [email protected]