Why Tower Semiconductor Fell This Week

Shares of Tower Semiconductor (TSEM 0.49%) fell 11.3% this week through Thursday trading, according to data from S&P Global Market Intelligence.

Tower fell this week after it announced its pending acquisition by Intel (INTC 0.52%) would be terminated, as neither party had received approval from Chinese authorities by the Aug. 15 termination date.

Despite Tower being set to receive a $353 million termination fee, the stock fell back to earth anyway, as Intel had offered the company a lofty $54 per share acquisition price -- a substantial premium over where Tower was trading before the February 2022 offer.

So what
Intel had been quite eager to get into the foundry business and likely saw Tower as a good target due to its experience running fabs, its concentration on some attractive trailing-edge power chip and image sensor markets that Intel doesn't play in, and its use of specialty process technologies that are difficult to transfer to another foundry.

So, Intel offered a substantial premium to the mid-$30 price Tower was trading at just before Intel offered to buy it for $54 per share back in February 2022. The acquisition was also proposed on the eve of the rather severe semiconductor downturn the industry experienced over the past 18 months, making it even more expensive. Yet over the past 18 months, Chinese regulatory authorities failed to rule on the acquisition, exceeding the Aug. 15 deadline agreed to by both companies. When that date passed, both parties decided to terminate the deal.

China has done this before when it wishes to stop an acquisition of or by an American company. It doesn't come out and rule against the deal, but rather does nothing, forcing the companies to wait in limbo until the deadline lapses.

On the one hand, it's not surprising that China would be against the deal. It's a large consumer of semiconductors and would likely not want more concentration among its foreign suppliers. Moreover, China is investing heavily in its own trailing-edge chip ecosystem for power and image sensor chips. And the U.S. has blocked the sale of key advanced-node AI chips and semiconductor equipment to China over the past year, likely further rankling authorities.

On the other hand, the adversity is somewhat surprising given that Intel has and continues to have substantial business operations in China, employing 12,000 people in the country and generating 27% of its revenue there last year. Perhaps Intel CEO Pat Gelsinger thought this long relationship, along with a charm offensive, could overcome the icy relations between the two countries -- but apparently not.

Now what
Tower could have used the acquisition, as its last quarter was not particularly great. After strong growth in 2022, revenue fell over 16% last quarter, with net earnings per share falling 13%.

Yet on the plus side, Tower does have a strong balance sheet, with a net cash position of about $500 million or so. And those cash coffers are about to get another $353 million infusion from Intel. Meanwhile, the stock trades at an undemanding 13.5 times 2023 earnings estimates.

So for value investors, Tower may be worth a look on the post-deal-cancellation sell-off, especially if the chip industry rebounds next year. Still, as an outsourced foundry, it's probably never going to garner a high multiple due to cyclicality and ongoing capital investments.