China wants to buy a South Korean chipmaker: Uncle Sam says no – and that’s that

By Elles Houweling

Magnachip Semiconductor Corporation, a South Korea-based chip manufacturer, has been compelled to terminate a US$1.4bn merger agreement it had struck with Chinese private equity firm Wise Road Capital, following a request from the US Treasury Department.

The Committee on Foreign Investment in the United States (CFIUS) sent Magnachip a letter in August, asking the firm to put the deal on hold on the grounds of national security concerns to the US. On Monday, the two companies officially terminated the merger deal.

“This course of action resulted from the inability of the parties, despite months of effort, to obtain CFIUS’s approval for the merger,” Wise Road and Magnachip said on Monday.

“While we are disappointed by the termination of our merger agreement, we are confident that Magnachip remains well positioned to create value for our shareholders as an independent public company,” said YJ Kim, Magnachip’s CEO.

The company’s shares have dropped nearly 4% over the past five days.

Magnachip is a US-listed Delaware corporation with its operational headquarters, R&D, manufacturing and most of its other facilities in South Korea. When it announced the merger with China’s Wise Road Capital, it did not believe any regulatory approvals were required in the US, based on the fact that it had few employees, tangible assets and IT systems in the US.

Nonetheless in May, the CFIUS initiated a pre-closing review of the proposed merger and issued an interim order prohibiting the completion of the deal in June.

In September, Magnachip announced that the parties had withdrawn and refiled their CFIUS notices as an administrative step, hoping it would buy the parties more time to negotiate with the US Treasury Department.

It appears that Magnachip had shut down some US operations to facilitate the deal. In the company’s 2020 annual report, it was shown that Magnachip had a facility in San Jose, California, which it used for “administration, sales and marketing and research development functions”. The facility was closed only recently.

The deal was also under scrutiny in South Korea, where regulators labelled Magnachip’s light-emitting diodes (OLED) display driver integrated circuits (DDICs) as a “national core technology”.

It does not come as a surprise that the US government attempted to block the merger. It has done so before, for example, in the cases of Aixtron, Micron, Lattice Semiconductor, Qualcomm and most recently, Nvidia. However, it appears to be the first time South Korea has attempted to do something similar.

“This apparent tag-teaming by US and South Korean regulators seems strange,” Chris Miller, an assistant professor at Tuft University’s Fletcher School of Law and Democracy, wrote in Foreign Policy in June. “It isn’t clear whether the initial impulse to block the deal came from Washington or Seoul. But though the two governments have only taken interim steps, it seems unlikely that either government will let the deal go through in its current form.”

Magnachip was spun off from SK Hynix, the South Korean chip giant, in 2004, when it got rid of its non-memory semiconductor operations. In the process, Magnachip inherited five fabs as well as foundry operations from its parent company, but over time had to close down two of them.

According to GlobalData’s intelligence centre, the company manufactures and designs analogue and mixed-signal semiconductor platform solutions. It also provides speciality analogue and mixed-signal foundry services mainly for fabless and Integrated Device Manufacturer (IDM) semiconductor companies that primarily serve communications, Internet of Things (IoT), consumer, industrial and automotive applications. The company also offers display solutions and power solutions. It operates in South Korea, Asia Pacific, USA and Europe.