October 27—Advanced Micro Devices (AMD) announced plans to acquire Xilinx for $35 billion in an all-stock deal. Reports of the merger appeared earlier this month but predicted the transaction’s value would be around $35 billion. If the deal receives regulatory approval, it will be one of the biggest consolidations in the semiconductor industry’s history.
AMD also published its financial results for the third quarter, which revealed the firm grew its business by 56 percent.
Unpacking AMD’s $35 Billion Purchase of Xilinx
The agreement stipulates Xilinx’s stockholders will receive 1.7234 AMD shares in compensation for their existing assets. That means the buyer is effectively paying a 25 percent premium to make its purchase. Once the sale closes, ownership of the combined firm will be split 74/26 in favor of AMD’s investors.
The acquiring corporation noted the tie-up should create $300 million and operational efficiencies within 18 months of completion.
After absorbing Xilinx, AMD will have 13,000 employees worldwide and an annual research and development budget of $2.7 billion. The firm intends to use its new resources to become the market leader in the high-performance computing sector. AMD CEO Dr. Lisa Su will serve as the reorganized corporation’s CEO, and Xilinx chief executive Victor Peng will become its new president.
The deal has been approved by the board of directors of both companies but still has some hurdles to clear. Shareholders of both chipmakers must consent to the merger, and it needs the authorization of regulators in the U.S. and China. If AMD terminates the deal, it will pay Xilinx $1.5 billion, and Xilinx will owe AMD $1 billion if the inverse occurs.
Despite the complex nature of the transaction, the buyer expects it to close by the end of 2021.
The AMD-Xilinx tie-up ranks as 2020’s semiconductor industry merger behind Nvidia’s $40 billion purchase of Arm. This year also saw Analog Devices announce it would purchase Maxim Integrated for $20 billion, and Infineon Technologies close on Cypress Semiconductor for $9.7 billion.
AMD’s Q3 Performance
In addition to its game-changing takeover, AMD revealed it did extremely well during Q3. In the period prior, the fabless chipmaker made $2.80 billion in revenue versus $1.801 billion in the same timeframe last year. The firm also recorded $390 million in net income or earnings per share of $0.32, up 225, and 191 percent year-over-year, respectively.
Dr. Su explained AMD had an outstanding quarter due to robust demand for its data center, gaming, and personal computer products.
The company improved its core computing and graphics revenue by 30 percent annually. The coronavirus pandemic prompted work-from-home transition undoubtedly drove that segment’s growth.
The global health crisis had an even bigger impact on its enterprise, embedded, and semi-custom unit. Last year, the division brought in $525 million, but it generated $1.134 billion in sales in Q3 2020. That 115 percent sales surge is evidence of AMD’s success in carving out a niche in the online services sector.
Intel is currently the data center processor market leader, with revenue of $5.9 billion in Q3 alone. But the manufacturer’s inability to mass-produce 7nm products puts it behind the curve technologically. AMD, which contracts Taiwanese Semiconductor Manufacturing Corporation (TSMC) to fabricate its cutting-edge components, is looking to capitalize on the opportunity created by its rival’s struggles.
AMD’s Remarkable Long-Term Prospects
AMD anticipates earning $2.9 billion to $3.10 billion in Q4. Provided the chipmaker hits the midrange of its guidance, it will expand its business by 41 percent year-over-year. The firm also revised its annual income guidance up by 32, which translates to $9.49 billion for full-year 2020. The company’s forecast represents a 41 percent revenue improvement from 2019.
AMD based its robust outlook on the expected high sales of its Ryzen desktop chipsets and EPYC server components. It noted its “growing customer momentum” will benefit its bottom line in the current period.
Based on its latest regulatory disclosures, AMD looked to be on course for a very good 2021. But in factoring in its buyout of Xilinx, the firm could blow away next year’s revenue in 2022.
Not only will it be able to profit from the sales of its new subsidiary’s products, but it will also be able to tap its expanded brain trust for new design ideas. Since the company has access to best-in-class manufacturing resources via TSMC, it could come to dominate the data center sector very quickly.
In other words, AMD has a bright near-term future and dazzling long-term prospects.