US, South Korea Block Sale of Magnachip to Chinese Fund

Magnachip Semiconductor Corp. may not be a household name for the majority of our readers, but the company has become just another front in the ongoing semiconductor trade war between China and, well, essentially the rest of the world. Regulators from both South Korea and the U.S. recently blocked the sale of Magnachip to Wise Road Capital, a Chinese private equity investment fund, in a bid to limit China's access to advanced chip technologies.

The Committee on Foreign Investment in the United States (CFIUS) late last month asked Magnachip to pause its acquisition by Wise Road Capital until a full government review of the transaction could be completed, the company revealed in a June 17 filing. The company faced further hurdles with the deal, as South Korean regulators labeled Magnachip OLED DDICs as a 'national core technology,' reports EE Times. Keeping in mind that Magnachip supplies its DDICs to a variety of OLED screen makers in South Korea, the regulators may be right with their assessment. 

Magnachip was spun off from SK Hynix in 2004, when the company got rid of its non-memory semiconductor operations. The company got five fabs as well as foundry operations from its parent company, but over time had to close down two of them. Magnachip develops and produces analog and mixed-signal semiconductor-based solutions, including display driver ICs (DDICs) for OLEDs of different sizes, switches, converters, power management ICs (PMICs), MOSFETs, and many other types of products. Magnachip is a South Korean company traded on NYSE, with offices across the world, selling chips for a wide variety of applications to hundreds of corporate customers. 

Wise Road Capital is an investor of Chinese smartphone maker Huaqin, which is backed by Qualcomm (among other companies). A smartphone manufacturer could greatly benefit from Magnachip technologies, though it is unlikely that Wise Road would insist on making Magnachip's DDICs and PMICs available exclusively to one company. 

In March, 2021, Magnachip sold its largest wafer fabrication facility (responsible for 70% of its production) and foundry operations to a consortium of South Korean-based investors for $435 million, according to EE Times. The same month it also entered into a definitive agreement to sell the company to Chinese Wise Road Capital for $1.4 billion and make it private. Under the terms of the deal, Magnachip shareholders would have received $29 in cash per share, which represented a 54% premium to Magnachip’s unaffected closing price on March 2, 2021. In early June, Magnachip received a proposal from Cornucopia Investment Partners to sell the company for $1.66 billion, which would give each shareholder $35 in cash per share. 

Given that there is a higher bid for Magnachip in place, the management may not have to sell the company to Wise Road, whereas regulators from South Korea and the U.S. will not have to formally block the deal. Meanwhile, it is the order from CFIUS that demanded Magnachip to pause the transaction (even before the South Korean regulators contacted the company), which shows how serious the U.S. government is about blocking access of Chinese companies to advanced semiconductor technologies. 

In fact, the U.S. government blocked multiple transactions of high-tech companies on various grounds, including Aixtron, Micron, Lattice Semiconductor, and Qualcomm, reports Foreign Policy. Yet this looks to be the first time that South Korea has attmpted to do something similar. This is actually a bit surprising since it is South Korea that crucially depends on chip exports and should be afraid of Chinese expansion into this market. 

"This apparent tag-teaming by U.S. 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. "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."