Intel pays $5.4 billion for Israeli chipmaker Tower Semiconductor, expanding foray into contract manufacturing

Intel confirmed Tuesday that it will pay $5.4 billion for an Israeli company that makes specialized computer chips for other businesses.

The deal for Tower Semiconductor represents Intel’s biggest acquisition under CEO Pat Gelsinger and is the company’s most definitive step to date in its nascent expansion into contract manufacturing, known as foundry work.

The Wall Street Journal reported Monday that a deal was imminent, suggesting Intel might pay as much as $6 billion for Tower. Intel said the acquisition diversifies its business by expanding beyond the advanced technologies in its microprocessors.

“This deal will enable Intel to offer a compelling breadth of leading-edge nodes and differentiated specialty technologies on mature nodes – unlocking new opportunities for existing and future customers in an era of unprecedented demand for semiconductors,” Gelsinger said in a written statement.

Intel will buy Tower for $53 a share, a 60% premium over Tower’s share price at Monday’s close. Shares in Intel, Oregon’s largest corporate employer, were little changed in premarket trading Tuesday, up 1.2%.

Tuesday’s transaction represents another expensive gamble in Gelsinger’s plan to reestablish Intel’s competitive edge. He’s already committed at least $25 billion a year to new and expanded factories, and billions more to restore the company’s engineering prowess after successive manufacturing failures.

Investors aren’t thrilled. The company lost $26 billion in market value in a single day last October after Gelsinger outlined his spending plans. Shares plunged again last month after Intel reiterated that the spending will depress profit margins for several years.

Intel is hosting a highly anticipated investor meeting Thursday, when Gelsinger will explain to Wall Street the mechanics of his strategy and lay out the financial details of his plan.

With Tower, at least, Intel is buying a growing and profitable business. Its sales grew by nearly 20% through the first nine months of the year, to $1.1 billion, and profits nearly doubled to $102 million.

News reports last summer indicated Intel had been contemplating a much more expensive bet, paying up to $30 billion for contract manufacturer Global Foundries.

Intel’s own factories are generally geared for advanced semiconductors, highly advanced products that serve as the powerful brains inside data centers, PCs and laptops. But much of the current shortage plaguing on the chip industry is focused on less advanced chips that play indispensable roles in cars, toys and appliances.

Those are markets where Tower thrives, making analog semiconductors for automotive, industrial, medical and defense clients. Unlike Intel, Tower doesn’t engineer the chips itself. Instead, it provides factory space to other technology companies.

So while Tower won’t do much to advance Intel’s leading-edge technology, it does open the door to other markets with explosive demand.

And it expands Intel’s operations in Israel, where the company is already the country’s largest private employer. It has substantial factory and research operations and owns the Israeli self-driving car business Mobileye, which appears at the forefront of autonomous vehicle technology.

— Mike Rogoway | [email protected] | Twitter: @rogoway | 503-294-7699

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