By Asa Fitch
Advanced Micro Devices Inc. plans to buy rival chip maker Xilinx
Inc. in a $35 billion deal, adding momentum to the consolidation of
the semiconductor industry that has only accelerated during the
AMD and Xilinx on Tuesday said the companies reached an
all-stock deal that would significantly expand their product range
and markets and deliver a financial boost immediately on closing.
The Wall Street Journal previously reported the two were close to
The U.S. semiconductor industry is going through a seismic
transformation, driven both by a wave of corporate transactions and
a pandemic that has supercharged demand for some chips.
AMD's planned purchase of Xilinx, which still must pass
regulator scrutiny in the U.S. and abroad, would be one of the
biggest among chip makers and would mark only the latest landmark
proposed transaction in recent months. It comes just weeks after
graphics chip-making giant Nvidia Corp. agreed to pay $40 billion
for Arm Holdings, the British mobile-phone chip design giant backed
by SoftBank Group Corp., in what would be the industry's biggest
ever deal if it goes through.
That proposed tie-up landed after Analog Devices Inc. in July
agreed to pay more than $20 billion for Maxim Integrated Products
Santa Clara, Calif.-based AMD specializes in central-processing
units and graphics chips at the heart of modern computers. Its
shares have advanced strongly this year as the pandemic fueled the
sale of laptops, as well as gaming systems such as Microsoft
Corp.'s Xbox and Sony Corp.'s PlayStation that use AMD chips. The
company has also benefited from a business selling processors for
data centers that has taken off with the introduction of new
generations of high-performance chips in recent years under Chief
Executive Lisa Su, making it a more formidable competitor to larger
rival Intel Corp.
AMD is enjoying a surge at a time when Intel has been
struggling. Both companies have benefited from the spike in demand
for laptops and cloud computing as people increasingly work from
home. Intel, however, has been stung by problems with its
manufacturing process that analysts believe could help competitors
like AMD advance. AMD shed its chip-making facilities more than a
decade ago and now relies on others to make its products, such as
Taiwan Semiconductor Manufacturing Co., which runs some of the
world's leading chip plants.
This year's almost 80% increase in AMD's share price gave it the
financial firepower to scale up in a move similar to Nvidia, which
plans to use about $21.5 billion in stock to pay for Arm.
With the chip industry consolidating and customer needs
changing, Ms. Su said size is necessary to keep pace.
"We built a very strong business around the foundation for AMD,
but when you look at where the markets are going in the future, I
think scale matters," she told the Journal, adding that the
companies' cultures, technology strategies and business models
Customers, she said, increasingly want a variety of computing
engines--chips that specialize in artificial intelligence, for
example, or networking--instead of jack-of-all-trades chips. And
chip development costs are rising, which gives the competitive edge
to those with larger checkbooks.
Xilinx specializes in chips that differ from the norm by
allowing users to reprogram them after they are produced. Because
of that flexibility, they are useful in arenas where fast
prototyping is valuable and where customers don't need to produce
chips in large numbers.
Xilinx caters to some of the same customers as AMD, including
operators of large data centers filled with servers that crunch
companies' data and power the internet. AMD promises $300 million
in cost savings from the combination within 18 months.
Xilinx would also give AMD a foothold in areas where it's a
small player or entirely absent, including telecommunications
infrastructure and defense. Xilinx chips are used in the U.S.'s
latest combat plane, the Lockheed Martin Corp. F-35 Joint Strike
Fighter. They're also commonly used in superfast 5G network
Financially, the deal, on closing, would immediately improve
AMD's profit margins, earnings and cash generation, the company
said. The move could also aid AMD in reaching its goal of 20%
annual revenue growth over the next few years.
Under the deal, Xilinx shareholders are to receive around 1.7234
AMD shares for each of their Xilinx shares, representing a premium
of almost 25% over the company's current value.
The addition of Xilinx, led by CEO Victor Peng, would put AMD on
a more even keel with Intel, which entered the fray in the chips
Xilinx specializes in--called field-programmable gate
arrays--through its $16.7 billion acquisition of Altera in
Despite the meteoric rise in AMD's share price and ambition, it
lags far behind Intel in other measures of size. Intel has roughly
10 times the number of AMD's employees and made $71.9 billion of
revenues last year, compared with AMD's $6.7 billion. And Intel
still maintains a commanding lead against AMD in measures of market
Along with the transaction, AMD on Tuesday reported a jump in
third-quarter profit, propelled by the same pandemic-fueled demand
for videogame consoles and computer processors that has underpinned
its stock much of the year.
The company said it had $2.8 billion in sales in the quarter, up
56% from the year prior. It generated 32 cents in earnings per
share, almost triple the year-ago figure. Both sales and per-share
earnings topped Wall Street estimates according to analysts
surveyed by FactSet.
Xilinx last week posted quarterly sales of $767 million.
The combined company would have a workforce of around 13,000
engineers, the companies said. Ms. Su would continue to be CEO of
the combined company, while Mr. Peng would become president at AMD
responsible for the Xilinx business. Mr. Peng, who worked at AMD
earlier in his career, would report directly to Ms. Su.
AMD advisers included Credit Suisse, DBO Partners and the law
firm Latham & Watkins. Xilinx's advisers were Morgan Stanley,
BofA Securities and the law firm Skadden, Arps, Slate, Meagher
& Flom LLP.
Write to Asa Fitch at firstname.lastname@example.org
(END) Dow Jones Newswires
October 27, 2020 06:45 ET (10:45 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.