On the morning of Wednesday, Aug. 16, microchip giant Intel(NASDAQ: INTC) terminated its proposed buyout of analog semiconductor foundry Tower Semiconductor(NASDAQ: TSEM). The all-cash acquisition had been in the works since February 2022, but the two companies couldn't get the necessary regulatory sign-offs after 18 months.
The key holdout was China, whose approval was needed because Intel has manufacturing facilities there. The deal reached a standstill amid rising geopolitical tension and a global wave of inflation-based economic pressure. In the end, Chinese regulators never signed the agreement, resulting in a canceled contract.
So instead of a $5.4 billion check to close the deal, Intel is sending $353 million to Tower as a termination fee. Is the canceled deal a disaster for Intel and Tower, or does the termination come with a silver lining for investors?
The Tower Semi situation
The Israel-based analog chipmaker's investors never seemed to embrace the Intel deal. The agreed price of $53 per share was always out of reach as the stock peaked at just $49.12 per share.
Also known as TowerJazz, Tower Semiconductor clamped down on its corporate communications when Intel launched the buyout bid. As a result of this quiet period, the company hasn't offered much color commentary to its bare-bones financial reports. And the raw numbers have not been great recently:
TSEM Revenue (TTM) data by YCharts
Revenue in the recently reported second quarter fell 16% year over year. Earnings dropped 13% over the same period. Tower Semi's shareholders appear to have given up on closing the Intel merger almost from the start. The company is left with a quick cash infusion that will boost its cash equivalents by 33%, but there is no business momentum to speak of at the company.
Tower CEO Russell Ellwanger offered a bullish update in the company's press materials for the termination, arguing that Tower has made "significant technological, operational, and business advancements" while pursuing the Intel deal. However, the company's financial situation looks precarious. Sales have been sliding for a full year, resulting in negative cash flows. Unlike Intel, this company doesn't have billion-dollar cash reserves to stave off lengthy downturns.
I would not recommend buying this stock until Ellwanger and his C-suite team provide a more detailed review of current and developing business prospects.
Can Intel use that $5.4 billion cash reserve somewhere else?
On Intel's side of the table, the $5 billion of recovered cash (the total buyout price minus the termination fee) should immediately find a new purpose. Chipzilla has been raising cash and setting up innovative financing structures in recent quarters in order to boost its own chip-building infrastructure. Tower would have been a welcome addition to Intel Foundry Services (IFS), but simply having some extra cash available should also help.
Either way, the show must go on. In Intel's press materials, CEO Pat Gelsinger said that the company is well on its way to regaining global leadership in processor technologies by 2025, based on those expensive manufacturing facility upgrades.
Intel's stock price is down by 29% since the Tower Semi drama started. Sales are also down dramatically and trailing earnings are currently negative. However, the IFS business is starting to pay dividends, and Intel's overall business should benefit from the ongoing artificial intelligence (AI) boom.
All things considered, Intel should be able to shake off the disappointing TowerJazz saga and double down on its existing business plan. The stock doesn't look spring-loaded for a huge rebound, but Intel could be a solid buy for long-term investors patiently eyeing the incoming AI opportunity.
While the cancellation of the Intel-Tower deal feels like a setback today, it also allows both companies to plot a new course. Tower faces the challenge of giving its financial performance a credible boost, while Intel now has more cash available to invest in its core business.
Both parties would indeed have preferred taking the canceled deal to its originally planned conclusion, but the termination isn't a game-changing failure. You can see it as a reshuffling of fundamental priorities, which could unlock new growth for both Intel and Tower Semi over time.
That said, patience may be the key for investors. I'm staying on Tower Semi's sidelines until the company offers a clearer view of what's next, and I'm content with maintaining my current Intel position for now.
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Anders Bylund has positions in Intel. The Motley Fool has positions in and recommends Tower Semiconductor. The Motley Fool recommends Intel and recommends the following options: long January 2023 $57.50 calls on Intel and long January 2025 $45 calls on Intel. The Motley Fool has a disclosure policy.
