NEW YORK (BLOOMBERG) - Advanced Micro Devices (AMD) agreed to buy Xilinx for US$35 billion (S$47.7 billion) 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 US$143 a share, 25 per cent more than the closing price on Monday and 35 per cent above the price before news of a possible deal was reported earlier in October.
The deal is a coup for AMD chief executive officer Lisa Su, creating a company with a larger research-and-development budget and a broader array of products to take on Intel Corp.
Since taking over in 2014 when AMD was in crisis, she has slashed debt and overseen the development of more powerful processors. Revenue and profit have surged and the stock has soared. Now Ms Su is using that currency to snap up a company with complementary products that generate steady cash flow.
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.
AMD also reported third-quarter results that beat Wall Street estimates and gave a strong revenue forecast for the current period, buoying confidence in Ms Su's ability to absorb Xilinx and continue growing the combined company. Sales in the fourth quarter will be about US$3 billion, a jump of 41 per cent from a year earlier. On average analysts had projected US$2.62 billion. That follows an increase of 56 per cent in the third quarter due to demand for PC, gaming and data center processors. That's a contrast to Intel, which recently reported a surprise drop in data center chip sales.
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 close. When the transaction is complete, it will immediately improve AMD's profitability, cash flow and revenue growth, the company said in a statement. AMD shareholders will own 74 per cent of the new entity.
"This is truly a compelling combination that will create significant value for all stakeholders, including AMD and Xilinx shareholders who will benefit from the future growth and upside potential of the combined company," Ms Su said in the statement. She will be CEO and Xilinx's Victor Peng will be president overseeing the Xilinx business and strategic growth initiatives.
The deal will give Ms Su more of the pieces she needs to break Intel's stranglehold on the profitable market for data centre computer components. Xilinx, based in San Jose, California, makes field programmable gate arrays, or FPGAs. That 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 fifth-generation, or 5G, services. Xilinx is also rapidly expanding in data centers, 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.
Xilinx last week reported quarterly data centre sales were up 30 per cent and now account for 14 per cent 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.com 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 that are 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.
