GCS Holdings (GCS) announced it dropped the deal to sell itself to San’an Opto after U.S. regulatory authority blocked the transaction, reported TechNews.

GSC, a company registered in Cayman Islands, intended to sell itself for US $226 million to San’an Opto’s IC subsidiary SAIC Acquisition, but the deal was called off, due to concerns raised by The Committee on Foreign Investment in the United States (CFIUS).

Board members of GCS decided to terminate the transaction, and applied for resuming trade on the Taiwan bourse by Aug. 3.

CFIUS raised concerns about the acquisition case, but did not provide further details to explain its disapproval, said GCS spokesperson Simon Yu. GCS held a board meeting and agreed to terminate the deal, authorizing the company CEO Brian Ann to sign and process papers related to cancelling the agreement. The company signed a termination agreement, and announced it abandoned the merger deal.

Instead GCS announced the board decided to form a new IC joint venture with San’an Opto, and signed a Memorandum of Understanding (MoU). The two companies will form a joint venture to manage consumer electronics, mobile devices and other related products. The scope of the joint venture will include smartphones radio frequency, noise filters, fiber optic chips, power management devices, and new technologies R&D. Further details of the MoU and agreement are still to be announced.

The two companies did not discuss details of the joint venture yet, such as investments, share ratio, location of the new company, and division of labor, said GCS Chairman Darren Huang. GCS and San’an Opto also failed to address how the two companies will split clients in the new company, these factors will not be confirmed till late 2016, but there is no definite time frame.

Responding to whether GCS will move its U.S. production line to China, Huang stated the company factory was based in U.S. so it could be exposed to advanced technologies, a crucial factor behind San’an Opto’s decision to partner with GCS. Even if GCS moved its production line to China, it would not be able to transfer all its technology and clients to China. Moreover, the company’s fab in U.S. are 4-inch wafer fabs, which fails to meet the 6-inch wafer demands of San’an Opto clients.

Forming a partnership with San’an Opto is a good start, but the company is still searching for future strategic partners to develop 6-inch wafers, said Huang. The company will also discuss forming an IC joint venture with San’an Opto, and further discuss construction plans for 6-inch wafer fabs to expand production capacity.

GSC Holdings provides foundry services for gallium arsenide-based and gallium nitride-based radio frequency ICs, wireless devices, power electronics and optoelectronics, as well as gallium arsenide-based optical wafers and chips, reported Taipei Times.

The Chinese government invested in San’an Opoto’s development of III-V Group semiconductors, which the Chinese company is quickly absorbing through acquisitions, reported United Daily News (UDN). Epistar Chairman B.J. Lee is concerned Taiwan’s gallium arsenide industry will be affected by these policies.

The Chinese government has been using multiple methods to enter the third generation semiconductor industry, in addition to San’an Opto’s aggressive acquisition strategies in the downstream sector, in the upstream sector the Chinese government is backing the takeover of LED equipment manufacturer Aixtron, where Fujian Grand Chip Investment Fund and state-owned Xiamen Bohao Investment financed 49% of the acquisition.

China’s activities in the gallium arsenide industry is targeting more than power amplifiers for smartphone applications, evaluated B.J. Lee. In the future, the company will be targeting third generation semiconductors that will spur IoT and other wireless transmission product developments. The company expects high power and high-speed optoelectronic components to become the next fast growing industry in the semiconductor industry, where Taiwanese companies need to tread carefully as the Chinese government injects national resources to develop.

(Editor's Note: San'an Opto did not acquire a 49% stake in Aixtron in an acquisition deal as stated in the original article, the correct information should be the Chinese government financed 49% of Chinese investors Fujian Grand Chip Investment Fund acquisition of Aixtron. The article was updated as of Aug. 3, 2016.)