Last week, Intel Corporation scrapped its $5.4 billion deal to buy Israeli contract chipmaker Tower Semiconductor after their merger agreement expired without regulatory approval from China. This is an interesting case, as it highlights how geopolitical tensions between the US and China are infiltrating corporate deals, particularly for companies within the technology sector. In this blog post, we’ll explore some of these issues and ask the question, why did it all go wrong?
Over the past few years, the US conglomerate Intel has lost its global lead in chipmaking to East Asian competitors: namely, Taiwanese firm TSMC and South Korea’s Samsung. Intel is now playing a game of catch up to claw back their competitive edge, hence their initial plans to acquire the semiconductor manufacturer Tower, which was announced publicly back in February 2022. This was seen as a critical move for the US to regain a foothold within semiconductor manufacturing, which has become one of the central focuses of the US and China’s wider technology battle. These two countries are highly interconnected from a trade perspective, but in recent years tensions have been mounting. China has condemned the US’s clampdown on restrictions as an attempt to throttle Chinese tech development and slow their economic growth. Consequently, the Chinese government agency that decides whether to approve global mergers has now hit back by dragging its feet and ultimately blocking this multi-billion dollar Intel deal that would benefit the US. Although TechCrunch postulates it may have been technically possible to conclude the acquisition without approval, China represents a major part of Intel’s business and strategy, meaning getting the green light from regulators there was essential.
So, what happens now? Following the announcement, Intel shares fell by 3.6% in New York last week, while Tower’s Nasdaq-listed stock also plunged by 10.7%. Additionally, in accordance with the merger’s terms agreement, Intel must pay a hefty termination fee of $353 million to Tower. From a broader economic perspective, the failure of Intel to complete this deal is likely to send a further chill through US companies with strong ties in China, as it becomes increasingly difficult to conduct business amidst the backdrop of these two global superpowers’ rising tensions. Although we cannot predict exactly how events will unfold over the coming months, our guess is that US companies may now feel forced into choosing between having operations in China, or carrying out mergers and acquisitions around the globe. A tricky situation all round!
What’s your prediction? How have wider geopolitics affected your M&A strategy? Let us know in the comments below.
Comments