In its latest effort to expand its manufacturing capacity, Intel said it will acquire Tower Semiconductor for $5.4 billion. Israel-based Tower accepted Intel’s $53 per share offer, representing a 60% premium over Monday’s $33.13 closing price.

Intel CEO Pat Gelsinger described the deal as a major part of the IDM 2.0 strategy he outlined last year. The new integrated device manufacturing strategy doubles down on research and development and expands manufacturing capacity.

A key part of IDM 2.0 also established the creation of Intel Foundry Services (IFS), a separate business unit. IFS aims to provide manufacturing capacity for itself, and other semiconductor manufacturers, Gelsinger said at the time.

Tower Semiconductor promises to accelerate the goal of making IFS competitive with TSMC, the world’s largest chip manufacturer. Gelsinger believes IFS can become a major player, while addressing global supply chain constraints. Foundry services represents a $100 billion addressable market, according to Intel.

Intel formed IFS with the goal of becoming a major provider of foundry capacity in the U.S. and Europe. Last month, Intel committed $20 billion to build two manufacturing sites in Ohio. Intel noted that Tower focuses on growth markets including mobile, automotive and power. Tower has complementary manufacturing facilities in Israel, Italy, Japan and Texas. Its claimed annual capacity generates over 2 million wafer starts.

Intel’s Pat Gelsinger

“This acquisition announcement positions us to not only capitalize on the large and growing foundry opportunity,” Gelsinger said on Tuesday. “But it also helps to accelerate our efforts to address the unprecedented demand for semiconductors, and the need for a more balanced, resilient global supply chain.”

Scale and Synergy

Evercore ISI analyst C.J. Muse recently raised his forecast of chip sales this year to $645 billion from an earlier estimate of $630 billion-$635 billion. The new forecast represents a 16% increase in chip sales over last year.

During Tuesday’s briefing, Muse asked how Tower, with its current margins, could boost IFS.

“If I go by the gross margins in the low 20s, it would suggest that you’re not getting paid for the specialty technologies that Tower is offering,” Muse posed.

Gelsinger responded that Intel will be able to give Tower the scale that it now lacks. For Intel, besides bosting capacity, the deal expands its access to high-growth markets where Tower has a strong foothold.

“As we look at the ability to accelerate the build out of everything associated with foundry, whether that’s IP creation, customer service and support necessary, infrastructure requirements, we see the 30-year history of Tower as something that’s going to overall drive an acceleration of that business,” Gelsinger said.

Tower Semiconductor’s Russell Ellwanger

Tower CEO Russell Ellwanger acknowledged Muse’s margin concern. He responded that it’s a matter of his company’s limited scale.

“I fully agree manufacturing margins are very, very tied to manufacturing scale,” Ellwanger said. “How much capacity do you have to absorb fixed cost? Intel will add tremendously to Tower as far as manufacturing scale. As far as the products that we make, they are value-added products that are very well received by our customers. Relationships are extremely strong.”

Intel said it expects to close the deal within 12 months, pending regulatory approvals.