San Francisco — Advanced Micro Devices (AMD) has agreed to buy Xilinx for $35bn in stock, taking the chipmaker into more diverse and profitable markets and adding to its data centre offerings.
Xilinx investors will get 1.7234 AMD shares for each Xilinx stock they own. That values Xilinx at about $143 a share, 25% more than the closing price on Monday and 35% above the price before news of a possible deal was reported earlier in October.
The deal is a coup for AMD CEO Lisa Su, creating a company with a larger research and development budget and a broader array of products to take on Intel. It also tips the chip industry into a record year for mergers and acquisitions, with more than $100bn of agreements inked as large companies rush to consolidate in an increasingly competitive landscape.
AMD shares slid 2.8% to $879.97 as the market opened on Tuesday in New York. They had gained 79% this year up to Monday. Xilinx shares gained 10%. They are up 17% this year.
Since taking over in 2014 when AMD was in crisis, Su has slashed debt and overseen the development of more powerful processors. Revenue and profit have surged and the stock has soared. Now Su is using that currency to snap up a company with complementary products that generate steady cash flow.
In a conference call with analysts, Su noted Xilinx’s “deep strategic partnerships across a diverse set of growing markets — 5G communications, data centre, automotive, industrial, aerospace and defence”.
Some investors and analysts were concerned that AMD might borrow heavily to pay for a Xilinx acquisition, repeating costly mistakes from more than a decade ago. The all-stock deal unveiled on Tuesday should calm those fears.
The transaction is partly driven by the growth of big cloud-computing providers such as Amazon and Alphabet’s Google
Su noted that Xilinx has a “best-in-class gross margin profile and significant free cash flow generation.” She said the merger would create “considerable product, technology, market and financial benefits”.
AMD also reported third-quarter results that beat Wall Street estimates and gave a strong revenue forecast for the current period, buoying confidence in Su’s ability to absorb Xilinx and continue growing the combined company. Sales in the fourth quarter will be about $3bn, a jump of 41% from a year earlier. On average analysts had projected $2.62bn. That follows an increase of 56% in the third quarter due to demand for PC, gaming and data centre processors.
In contrast with comments and projections from Intel executives last week, Su said demand for data centre chips remains strong. Also contradicting her counterparts at the world’s largest chipmaker, she said AMD believes it gained market share again in the third quarter. “We are on track to deliver significant annual revenue growth this year and have never been more confident in our trajectory,” Su said on the call.
The acquisition still needs to be approved by shareholders and regulators, including authorities in China. AMD is targeting the end of 2021 for the deal to be closed. When it is, the deal will immediately improve AMD’s profitability, cash flow and revenue growth, AMD said in a statement. AMD shareholders will own 74% of the new company. AMD will pay Xilinx $1.5bn if it terminates the deal, while Xilinx has agreed to pay $1bn if it calls off the transaction, according to a regulatory filing.
Su will be CEO of the combined company and Xilinx’s Victor Peng will be president, overseeing the Xilinx business and strategic growth initiatives.
The deal will give Su more of the pieces she needs to break Intel’s stranglehold on the profitable market for data centre computer components. Xilinx, based in California, makes field programmable gate arrays (FPGAs). This kind of chip is unique because its function can be altered by software, even after it’s been installed in a piece of machinery.
FPGAs are used in wireless networks, so the purchase will give AMD new telecommunications customers just as that industry spends billions of dollars to build 5G services. Xilinx is also rapidly expanding in data centres, where its chips accelerate computing and help connect servers. The other major FPGA supplier is Intel, which gained its market position through the purchase of Altera in 2015.
Last week, Xilinx reported quarterly data centre sales were up 30% and now account for 14% of total revenue. While it generates less revenue than AMD, Xilinx is more profitable.
The transaction is partly driven by the growth of big cloud-computing providers such as Amazon and Alphabet’s Google. Those companies are spending heavily on new data centres to meet a surge in demand for computing power delivered via the internet. They’ve become major purchasers of server chips, which run thousands of computers packed into these data centres.
The cloud providers are also racing to enhance services, such as search, with artificial intelligence software, and many companies are experimenting with building their own hardware to do so. That’s putting greater pressure on chipmakers to improve their offerings.
At the same time, devices in some of Xilinx’s traditional markets, such as automotive and networking, are increasingly taking on more of the attributes of computers. AMD currently doesn’t have access to those customers, while Intel does.
Credit Suisse and DBO Partners advised AMD. Morgan Stanley advised Xilinx.
Bloomberg
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