Magnachip, Chinese PEF Wise Road end $1.4 bn buyout deal

US-listed chipmaker Magnachip Semiconductor Corp. and Chinese private equity firm Wise Road Capital terminated their $1.4 billion buyout agreement struck in March as Washington blocked the deal amid the ongoing US-China trade dispute.

In March, Magnachip, headquartered in South Korea, said it agreed on a merger with South Dearborn Ltd. and Michigan Merger Sub Inc., investment vehicles established by Wise Road Capital and certain of its limited partners.

Magnachip and Wise Road, however, failed to gain approval on the deal from the US government.

“This course of action resulted from the inability of the parties, despite months of effort, to obtain CFIUS’s approval for the merger,” Magnachip and Wise Road said on Dec. 13 in a statement, referring to the Committee on Foreign Investment in the United States. The US Treasury Department in August said the deal posed a “risk to national security.”

Magnachip will receive a termination fee of $70.2 million from South Dearborn.

US OPPOSITION

The US government has been opposing the buyout deal, seeing that it could pose a risk to national security.

In June, the CFIUS ordered the deal to be put on hold, requiring the establishment of interim mitigation measures, according to the Securities and Exchange Commission. Magnachip and Wise Road suspended the process for the transaction after the order.

Foreign Policy, an American magazine focusing on US domestic and international policies, has said in June that the fate of the deal would send a major message about how Washington is thinking about the US economic relationship with China.

“The Biden administration has de facto decided that all chip firms -- even if small, seemingly innocuous, and barely linked to the United States -- are off limits to Chinese buyers,” according to Foreign Policy.

Magnachip was not the first chipmaker that Washington has kept a Chinese entity from buying.

In 2015, the CFIUS blocked the purchase of Micron Technology Inc. by Chinese semiconductor manufacturer Tsinghua Unigroup. The Obama administration rejected a Chinese fund's plan to buy Aixtron SE in 2016 since the German semiconductor maker operated production facilities in the US.

In 2017, the US government rejected a Chinese fund’s proposed takeover of Lattice Semiconductor due to cited national security risk.

MAY SEEK OTHER BUYERS

In South Korea, Magnachip will withdraw its application for the buyout deal with Wise Road that had been submitted to the Ministry of Trade, Industry and Energy.

When the agreement was announced in March, industry watchers in South Korea said the deal may require approval by the ministry since non-memory chips may be included on the country’s core technology list.

Under the nation's Industrial Technology Protection Act, companies that hold technology designated as a national core technology are subject to the trade ministry's approval when exporting a national core technology or being acquired by a foreign firm.

Magnachip may look for other buyers such as South Korean companies in related sectors and PEFs, industry sources said.

The chipmaker is competitive as it was among the world’s top players in the global organic light-emitting diode (OLED) smartphone display driver IC (DDIC) market with a 33.2% share in the first quarter of 2020. It is also accelerating the development of automobile power solution products, which have recently been in short supply.

“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 Magnachip CEO Kim Young-joon.

(Updated with details, background)

Write to Jun-ho Cha at chacha@hankyung.com
Jongwoo Cheon edited this article.