In February 2022, semiconductor giant Intel(NASDAQ: INTC) agreed to a $5.4 billion acquisition of Tower Semiconductor(NASDAQ: TSEM), a foundry for analog semiconductor solutions. Had the acquisition gone through, Intel would have added a slate of specialty technologies on mature process nodes to its own foundry business, which is a pillar of the company's turnaround efforts.
But that deal was not to be. While the acquisition passed muster at most regulatory agencies around the world, China's refusal to approve the deal led to its demise, announced last month. Intel will pay Tower a $353 million termination fee.
While Tower will not become part of Intel, the two companies have found another way to deepen their relationship. Intel announced on Tuesday that the two companies have reached an agreement that will give a boost to Intel's foundry services business while providing increased U.S. manufacturing capacity to Tower.
Working together
Under the agreement announced on Tuesday, Tower will invest up to $300 million to acquire and install equipment and other fixed assets in Intel's advanced semiconductor manufacturing facility in New Mexico. This will provide capacity for more than 600,000 photo layers per month, helping Tower meet customer demand for its products. Intel will provide manufacturing capacity as well as foundry services.
Tower will use the capacity at Intel's facility to manufacture products on two of its 65nm manufacturing platforms, including power management chips and radio frequency chips. Intel's New Mexico facility will complement Tower's existing portfolio of manufacturing facilities, which includes two owned facilities in Israel, two owned facilities in the U.S., two facilities in Japan owned through a 51% stake in a joint venture, and a facility in Italy that will be shared with STMicroelectronics.
Another step forward for Intel's foundry business
While Intel didn't disclose the financial impact of this deal beyond the $300 million investment by Tower, this appears to be a significant step forward for Intel's foundry business. There could be further collaborations between Intel and Tower. "We see this as a first step toward multiple unique synergistic solutions with Intel," said Tower CEO Russel Ellwanger in the press release announcing the deal.
The deal with Tower comes just days after Intel disclosed that it had received a large prepayment from an unnamed customer to secure manufacturing capacity for the Intel 18A process, which is set to be ready for production by the end of 2024. Intel expects this cutting-edge process to deliver a manufacturing advantage over foundry market leader TSMC.
Beyond the most advanced chips, there's a big opportunity for Intel to manufacture a wide variety of simpler chips using mature manufacturing processes. In addition to the Tower deal, the company has reworked one of its older processes as "Intel 16" and has gained full support from the major third-party chip design tool providers for this mature process. By manufacturing a wide variety of chips, Intel can extend the lifespan of its process nodes and equipment.
In the long run, Intel's foundry business could eventually bring in tens of billions of dollars in revenue annually as the company provides a compelling alternative to TSMC. The global foundry services market is expected to top $200 billion by 2028. By focusing on both leading-edge and mature manufacturing processes, Intel can effectively go after a large swath of this enormous market.
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Timothy Green has positions in Intel. The Motley Fool has positions in and recommends Taiwan Semiconductor Manufacturing and 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.
