CFIUS disagrees, Zhilu's acquisition of Magnachip fails-EEWORLD

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Magnachip Semiconductor announced today that they will officially terminate the acquisition agreement with domestic Wisdom Road Capital.

They said the course of action came after the two sides were unable to obtain CFIUS approval for the merger despite months of efforts.

They noted that upon termination of the agreement, South Dearborn, a subsidiary of Wise Road, will pay the company a termination fee of $70.2 million, of which $51 million will be paid immediately and $19.2 million will be deferred until March 31, 2022. Under the merger agreement, the parties will release each other from all obligations related to the proposed merger transaction and any claims arising out of or related to the merger agreement.

"While we are disappointed with the termination of the merger agreement, we believe Magnachip remains well positioned to create value for our shareholders as an independent, public company," said YJ Kim, CEO of Magnachip. "This outcome does not impact the sound long-term fundamentals of our business and our ability to accelerate our MX 3.0 strategy. In fact, over the past eight months, our team has continued to advance our previously announced plan for sustainable and profitable growth for 2020-2023."

China's Zhilu Capital to acquire South Korean semiconductor company MagnaChip

South Korean semiconductor manufacturer MagnaChip Semiconductor announced on March 29 that it would accept a takeover proposal from Chinese investment fund Wise Road Capital. Wise Road Capital plans to make a public takeover offer (TOB) to acquire all shares of MagnaChip at $29 per share, a 54% premium over MagnaChip's recent share price. The expected acquisition amount is $1.4 billion.

MagnaChip mainly deals in display driver semiconductors and general power management semiconductors. MagnaChip does not own production equipment and specializes in semiconductor design. Its sales in fiscal 2020 were US$507.1 million and its operating profit was US$27 million. Wise Road Capital plans to complete the acquisition in 2021.

YJ Kim, CEO of Magnachip, said: "This transaction is in the best interests of all of our stakeholders, including shareholders, customers and employees. It will provide an excellent opportunity to accelerate our growth strategy for MX 3.0. Given their deep industry expertise, Wise Road Capital is an ideal partner for Magnachip and we look forward to working with them to plan the next phase of growth for our company. We remain grateful for the trust of our customers and the unwavering commitment of our colleagues to driving industry-leading products for our customers around the world."

Wise Road intends to work with Magnachip's management team to pursue the next steps in the company's growth strategy and transform the company into a true industry leader in the global display and power supply markets. Through its additional investment and global network, Wise Road will help Magnachip grow internationally. Wise Road remains committed to providing world-class products and services to the company's customers while creating a stable environment for the company's employees to grow and prosper.

Magnachip's board of directors has unanimously approved the agreement and recommends that Magnachip shareholders vote in favor of the transaction. Details of the transaction and agreement are included in the company's most recent Form 8-K report, which will be filed with the U.S. Securities and Exchange Commission in due course.

The transaction is expected to close in the second half of 2021, subject to customary closing conditions, including receipt of shareholder and regulatory approvals.

According to reports, Wise Road Capital is a global professional equity investment institution that focuses on investment opportunities in semiconductor core technology and other emerging high-end technologies. Wise Road Capital's investors include leading global high-tech companies, large financial institutions and family funds.

MagnaChip announced at the end of July 2020 that it had maintained its leading position in the global OLED smartphone DDIC non-captive market in the first quarter of 2020.

According to global market research firm OMDIA, MagnaChip's market share is 33.2%, the highest in the company's history.

For the past 14 years, MagnaChip has maintained a leading position in the global smartphone DDIC market for "non-captive suppliers", referring to independent producers who produce and supply products to customers without producer control. This trend began in 2007 when MagnaChip became the first company in the world to start mass production of OLED DDICs for mobile phone displays.

Since then, MagnaChip has continued to grow and has captured a large market share in recent quarters, such as 24.2% and 27.0% in Q2 and Q3 2019, respectively. Market share figures first exceeded 30% in Q4 2019, reaching 32.1%, and finally reached 33.2% in Q1 2020, a record high.

As smartphone manufacturers increasingly adopt OLED displays, demand for OLED DDICs is also expected to continue through 2025. According to another OMDIA report on OLED smartphone displays, the OLED smartphone market is expected to grow at a compound annual growth rate of 12% over the next five years, with global shipments expected to reach 813 million units in 2025.

MagnaChip is well known for its OLED DDICs, which feature small chip size, low power consumption, and advanced process technology. MagnaChip is also a pioneer in high frame rate OLED DDICs, a crucial technology for 5G smartphones.

Leveraging its extensive technology and know-how, MagnaChip plans to expand its business into new areas such as flexible OLEDs for high-end smartphones, OLEDs for automotive instrument panels and entertainment unit displays, and other advanced display technologies with high growth potential in the future.

“We are honored to be first in the OLED DDIC market and to maintain our leadership in the non-captive market with our innovative technology,” said YJ Kim, CEO of MagnaChip. “As OLED technology expands into a variety of applications, we will continue to develop high-quality new products that delight our customers.”

According to Baidu Encyclopedia, MagnaChip Semiconductor (formerly the system integrated circuit business of Hynix Semiconductor) has world-class technical capabilities and has 5 wafer fabs in South Korea.

MagnaChip develops, produces and distributes system integrated circuit chips, focusing on display driver integrated circuits, CMOS (complementary metal oxide semiconductor) image sensors and application solution processors, and operates foundry business. MagnaChip has world-class production capabilities and a wide portfolio of thousands of patents. Therefore, MagnaChip is a value-added partner that provides leading technology solutions to global companies.

U.S. Treasury: China's Wise Road Capital's acquisition of MagnaChip poses national security risk

According to a Thomson Reuters report in August this year, South Korean chip manufacturer MagnaChip Semiconductor Corporation mentioned in a document submitted to the U.S. Securities and Exchange Commission (SEC) on August 30 that the U.S. Treasury Department pointed out in a letter to the company's legal counsel on the 27th that the acquisition move by Chinese private equity firm Wise Road Capital Ltd. would pose a risk to U.S. national security.

The U.S. Treasury Department's Committee on Foreign Investment in the United States (CFIUS) ordered the deal to be shelved in June. Magna said in a filing with the SEC that it is evaluating its next steps but there is no guarantee it will agree to a proposal that would help CFIUS approve it.

According to EE Times, the company faces more obstacles in the deal as South Korean regulators have labeled Magnachip's OLED DDIC as "national core technology." Considering that Magnachip supplies its DDIC to various OLED screen manufacturers in South Korea, the regulator's assessment may be correct.

Magnachip was spun off from SK Hynix in 2004 when the company shed its non-memory semiconductor business. The company acquired five fabs and foundry operations from its parent company, but had to close two of them over time. Magnachip develops and produces analog and mixed-signal semiconductor-based solutions, including display driver ICs (DDICs) for different sized OLEDs, switches, converters, power management ICs (PMICs), MOSFETs, and many other types of products.

Magnachip is a South Korean company listed on the New York Stock Exchange with offices around the world, selling chips for a variety of applications to hundreds of corporate customers.

Wise Road Capital is an investor in Chinese smartphone maker Huaqin, which is backed by Qualcomm (among others). Smartphone makers could benefit greatly from Magnachip technology, although Wise Road is unlikely to insist that Magnachip's DDICs and PMICs be used exclusively by one company.

In March 2021, Magnachip sold its largest wafer manufacturing facility (accounting for 70% of its production) and foundry business to a consortium of Korean investors for $435 million, according to EE Times. In the same month, it also signed a definitive agreement to sell the company to Chinese capital for $1.4 billion and privatize it. Under the terms of the transaction, Magnachip shareholders will receive $29 per share in cash, a 54% premium to Magnachip's unaffected closing price on March 2, 2021. In early June, Magnachip received a sale proposal from Cornucopia Investment Partners, which acquired it for $1.66 billion, which would bring each shareholder to $35 per share in cash.

Given the latter's higher offer, management may not have to sell the company to Wise Road, and regulators in South Korea and the U.S. will not have to formally block the deal. At the same time, it was the CFIUS order that required Magnachip to suspend the transaction (even before the South Korean regulator contacted the company), which shows how serious the U.S. government is about blocking Chinese companies from entering advanced semiconductor technology.

In fact, the US government has blocked multiple deals for high-tech companies, including Aixtron, Micron, Lattice Semiconductor, and Qualcomm, for various reasons, according to Foreign Policy. However, this appears to be the first time South Korea has attempted to do something similar. This is actually a bit surprising, since it is South Korea that is critically dependent on chip exports and should be afraid of China expanding into this market.

“This apparent labeling collaboration by U.S. and South Korean regulators seems odd,” Chris Miller, assistant professor at Tuft University’s Fletcher School of Law and Democracy, wrote in Foreign Policy. “It’s unclear whether the initial impulse to block the deal came from Washington or Seoul. But despite taking only temporary steps, both governments seem unlikely to let the deal pass in its current form.”

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Keywords：Semiconductor Magnachip Reference address：CFIUS disagrees, Zhilu's acquisition of Magnachip fails

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