Intel’s $5.4 billion foundry acquisition hopes to catch its fabless chip rivals flat-footed

U.S. semiconductor giant Intel is wagering the world has more than its share of chip designers yet nowhere near enough capacity to produce the tiny circuits themselves.

The company that first put Silicon Valley on the map agreed on Tuesday to buy Tower Semiconductor, a foundry that manufactures 2 million wafers per year on behalf of other chipmakers, in an all-cash deal that values the Israeli company at $5.4 billion including debt. 

“Intel’s proposed acquisition of Tower positions us to not only to capitalize on the large and rapidly growing foundry opportunity, but also help our efforts to address unprecedented demand for semiconductors and the need for a more resilient balanced global supply chain,” Intel CEO Pat Gelsinger told investors on Tuesday.

After more than a decade during which the chip industry bet big on going “fabless” by outsourcing wafer production to independent specialists like Tower, the pendulum appears to be swinging decisively back. 

Reshoring has become a strategic priority for many governments including those in the United States and Europe, hobbled by a dependence on overseas chips to run their economies. Intel aims to seize the opportunity, forecasting significant growth in the $100 billion global foundry market alone.

Sales of every conceivable type of integrated circuit, both cutting-edge as well as older, more mature designs, are soaring. That is in part owing to manufacturers adding more and more intelligence to their products—endowing everything from consumer white goods to passenger cars with an ever increasing share of electronics as they connect them to the Internet of Things.

On Monday, the Semiconductor Industry Association (SIA) reported global demand in 2021 surged 26% to hit $556 billion, an all-time high, as chipmakers shipped a record 1.15 million semiconductor units. 

There’s a downside to this historic growth, however. Countries around the world learned a painful lesson last year on the need for secure semiconductor supply chains resilient to disruption, after fiscal and monetary stimulus sparked an economic boom that exhausted the combined production capabilities of the chip industry. Fires, winter storms, and COVID outbreaks threw a further wrench into wafer output.

As a result, anywhere between 8 million and 10 million fewer cars were built in 2021, each worth tens of thousands of dollars to the economy. More often than not this was owing to a shortage in bulk commodity chips that cost little more than 50 cents. 

The damage was so severe that Germany’s GDP expanded at the slowest rate among all the European Union member states after car production slumped to a more than 40-year low.

Move the needle

The underlying problem behind the crippling shortage is well known: Since the turn of the century, too many chipmakers decided to focus mainly on design, while preferring to outsource the risky, capital-intensive manufacturing of chips to foundries like Taiwan’s TSMC.

As one of the last remaining U.S. companies to both design semiconductors as well as produce them, Intel hopes to capitalize on this tectonic shift toward reshoring and catch many of its fabless competitors like Nvidia, AMD, and Qualcomm flat-footed. 

In January, Intel announced its first new manufacturing site in 40 years, at a cost of more than $20 billion, in Ohio, the single largest private sector investment in the state’s history.

There, it aims to mount its first push into leading-edge semiconductors where miniaturization is at its most advanced, such as the logic processors that run smartphones. The goal is to eventually produce transistors, the building block of a microchip, just five nanometers in size and below.

By comparison, Tower specializes not in digital circuits that crunch data but analog ones that can be found in electronics that regulate functions like the flow of current—inverters, for example. It operates eight chip fabs across the world directly or in partnership, and last forecast 2021 revenue at just over $1.5 billion, a 19% increase over the previous year.

Tuesday’s acquisition will expand the new Intel Foundry Services (IFS) business set up last year by Gelsinger. The Pennsylvania native returned to his first employer after running VMware with the explicit intention of expanding Intel’s manufacturing operations rather than spinning them off as AMD did with GlobalFoundries in 2008.

When we launched IFS last March…one of the things our customers consistently asked me was to add specialty and mature nodes to our portfolio,” said the business’s president, Randhir Thakur, during the call with investors. “With Tower, we can honor that request and more broadly serve key market segments.”

Analysts at UBS welcomed Tuesday’s deal, but argued Tower wouldn’t move the needle and maintained their neutral rating and $53 price target on Intel stock. Investors were more focused on Intel narrowing the technological gap to TSMC and Samsung. 

The two Asian competitors are the only manufacturers capable of mastering five-nanometer process technology, the most complex level of miniaturization found in circuitry today.

“It is unlikely to sway the debate as to whether Intel can garner enough leading-edge customers in high volume to offset the massive capex wave over the next several years,” they concluded in a research note. 

Shares in Intel were trading broadly flat at $47.75 early in the session, lagging solid gains in the broader equity market as a slight reduction in tensions over an impending war in Ukraine bolstered sentiment.

This article was updated on Feb. 15 to include new quotes and update the Intel share price information.

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