U.S.-listed shares of the Israeli company fell about 11% in premarket trading.
Intel, which had decided to buy Tower last year, will pay a termination fee of $353 million to the latter, the company said in a statement.
“After careful consideration and thorough discussions and having received no indications regarding certain required regulatory approval, both parties have agreed to terminate their merger agreement having passed the August 15, 2023 outside date,” Tower Semiconductor said in a statement.
The development underscores how tensions between the United States and China over issues including trade, intellectual property and the future of Taiwan are spilling over into corporate dealmaking, especially when it comes to technology companies.
Intel Chief Executive Pat Gelsinger had said he was trying to get the Tower deal approved by Chinese regulators and had visited the country as recently as last month to meet with government officials.
But Gelsinger also said Intel was investing in its foundry business, which makes chips for other companies, irrespective of the Tower deal.
In June, Israeli Prime Minister Benjamin Netanyahu announced that Intel had agreed to spend $25 billion on a new factory in Israel, the largest-ever international investment in the country.
Investors had given up hope on the Tower deal as a result. Tower’s Nasdaq-listed shares ended trading at $33.78 on Tuesday, a steep discount to the $53 per share deal price.
In the second quarter, Intel’s foundry business reported revenue of $232 million, up from $57 million a year earlier, as it made advances on rivals such as industry leader Taiwan Semiconductor Manufacturing Co (2330.TW).
The rise in foundry sales came from “advanced packaging,” a process in which Intel can combine pieces of chips made by another company to create a more powerful chip.
Demand for Intel’s chips has cooled after two years of strong growth driven by remote work during the pandemic, leading the chipmaker to turn to cost cuts. It has committed to trimming $3 billion in costs this year, with an aim of saving between $8 billion and $10 billion by the end of 2025.