Intel buys Tower – Best way to become foundry is to buy one

-Intel jumpstarts foundry model with Tower semi buy @$54B Gets complementary tech to round out offerings
-Approval based on satisfying China’s needs as well
-Margin concerns overblown- Will it be allowed to flourish?

Intel pays up to get foundry and technology….

Intel announced a $5.4B acquisition of Tower Semiconductor in Israel. This amounts to $53 per share for a company whose last trade was $33 per share or a whopping 60% premium.

Intel is getting a very well run company that has been a foundry for a long time as well as technology that it currently does not offer that will add to a broader foundry offering other than just bulk CMOS.

In addition the company gets more China business as well as military business both of which are needed to support Intel’s strategic direction. In essence this deal covers multiple birds with one stone which likely accounts for the premium.

Margin concern is overblown and wrong way to look at it

On the conference call a number of analysts seemed to be negative on the acquisition due to Towers lower margins. Most any company acquired by Intel is going to have lower margins and being a smaller player of older technology in the land of giant TSMC is not easy on margins.

We don’t think Intel is buying the business for its margins or financials or as a “bolt on” but obviously for its current positioning as a foundry with complementary technology to Intel. If Tower can help Intel’s core become a more competent foundry than that is more than worth the acquisition price alone.

Will Intel let it succeed?

The main reason Intel previously failed in the foundry business was that the upstart foundry group was smothered by the larger IDM corporate mentality. The current foundry effort is relatively weak as Randhir Thakur has never run a foundry or anything close. Our hope is that the management of Tower becomes the more dominant partner rather than being suppressed. In this way Intel can try to get what it paid for… expertise.

Corporate antibodies are strong in this one and Pat Gelsinger may have to take steps to make it so.

We like Tower and its management

We view Tower as a tough, smart, scrappy company in the model of many other Israeli companies. It has been cobbled together over the years out of a string of deals and acquisitions for little to no money that has followed a much different model.

We have known the CEO, Russell Ellwanger since his days at Applied Materials and think he has done a great job. If Tower’s mentality and methods can be set loose in a much larger company with large resources they might get a lot done.

A limited commodity

There aren’t that many foundries in the world that Intel could buy that would potentially make a difference and make sense.

We view Tower as a somewhat smaller but better, and more profitable version of Global Foundries. Global was cobbled together through a number of acquisitions and stumbled badly in mainstream CMOS and is now also trying to avoid the big dogs (like TSMC) by doing “specialty” silicon. AbuDhabi poured a ton of money into GloFo which is barely break even where Tower was more of a bootstrap operation that is solidly profitable. We think that Intel might have been interested in GloFo until its IPO priced it out of that possibility (but Intel could get a second chance)

Could China have been in the mix?

We would certainly have not been surprised if China was taking a hard look at Tower. China has been sniffing around a number Israeli based technology companies because of its concern about being cut off from US technology as well as CFIUS restrictions on foreign investment/acquisition which makes Israeli acquisitions much easier.

The very high premium could also be signs of a behind the scenes bidding war or wishing to avoid someone else (like China) coming in to outbid Intel after the deal was announced.

Technology is needed and complementary

The technology side should be a no brainer for Intel….just let it run and don’t screw with it. Most of the processes that Tower runs harken back to Gelsingers earlier stint at Intel and most of those Intel people took the buy out long ago, so Tower knows the tech better than Intel does.
Intel can likely help with some older equipment and fabs it has lying around and Tower could easily contribute to equipment reuse. Tower could likely get a ton of benefit from what Intel has written off.

The stock

While we view this deal very positively and a step in the right direction, it has to be approved first, which will likely take at least a full year and then be integrated (or not).

For Intel we think its a great trade to sell off the crummy memory business and get a foundry business in trade…it just makes sense.

We don’t see this as a reason however to run out and buy the stock of Intel as the impact will take years but we do see it supporting the longer term strategy.
We will likely hear more at Intel’s investor day this Thursday… In the presentation “Goliath buys David”.

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Also read:

The Intel Foundry Ecosystem Explained

Intel Embraces the RISC-V Ecosystem: Implications as the Other Shoe Drops

The Semiconductor Ecosystem Explained

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