In what is known as one of the most ambitious acquisitions ever witnessed in the tech industry, Advance Micro Devices (often referred to by its abbreviation AMD) has agreed to pay USD$ 35 billion in stock for Xilinx. This deal is aimed at reshaping one of the biggest pioneers in the computer industry.

AMD is Intel’s longtime rival in microprocessors powering most computers is planning to use the acquisition to widen its business into chips for markets such as 5G wireless communications and automotive electronics.

The transaction may help AMD acquire a larger share of component sales for data centers and counter Nvidia, who is poised to acquire chipmaker Arm Holdings from Japanese investment firm Softbank for USD$ 40 billion.

What is expected out of the deal?

The deal is known as an all-stock deal which was announced yesterday along with AMD’s financial results for the 3^rd quarter of this year. This is touted to be the most valuable acquisition in the history of the microchip industry.

At the moment, Nvidia holds the title for the industry’s most valuable acquisition for its proposed USD$ 40 billion deal for British chip designer Arm Holdings.

For quite some time, chip manufacturers have experienced numerous waves of consolidation which are driven by factors such as duplicate product lines and plans for reducing costs. However, AMD, who has enjoyed some of the most robust sales since its inception; is expecting Xilinx to expand its business whilst boosting profits.

AMD expects the deal to close at the end of the year 2021. It will create a combined company with 13,000 engineers and a manufacturing strategy fully outsourced with heavy reliance on Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC).

Both firms benefitted from a lean approach in holding the market share from Intel, who is recently struggling with internal manufacturing.

An overview of both AMD and Xilinx in recent years

For quite some time, AMD has been the chief rival of Intel in terms of central processor units (CPUs) in the personal computer business. When Lisa Su took over AMD in 2014, she has since then focused on challenging Intel in the fast-growing data center business.

Data centers power internet-based applications and services. Other than that, they are also fueling the rise of artificial intelligence and fifth-generation telecommunications networks.

Recently, Xilinx has also been working to enter the data center business with programmable processors fastening specialized tasks (digital encryption, video compression, etc.). Altera Corp is its main rival and it was acquired by Intel in 2015 for USD$ 16.7 billion in what is known to be Intel’s largest acquisition deal ever.

According to AMD CEO Lisa Su:

“There are some areas where we’re very strong, and we will be able to accelerate some of the adoption of the Xilinx product family, and there some areas where Xilinx CEO Victor Peng is very strong, and we believe that we’ll be able to accelerate some of the AMD products into those markets.”

Did the deal come up at a right time?

The deal comes at a time when Intel’s manufacturing technology has fallen way behind that of Taiwan Semiconductor Manufacturing Corporation (TSMC). Almost a decade ago, AMD spun off its factories and has since then surged ahead of Intel with chips that perform much better.

The edge in performance AMD earned helped it gain its best market share since 2013 at slightly less than 20% of the CPU market. This in turn pushed AMD’s shares up by 68% between this year’s start and close of trade on October 26.

Does Xilinx also use TSMC’s facilities for production?

Yes, it does. Xilinx has been using TSMC’s factories (known as fabs in the industry) for making its chips. Both AMD and Xilinx have been using modular designs that let them swap out different pieces of a chip to avoid possible bottlenecks and delays.

According to Xilinx CEO Victor Peng:

“We ended up with TSMC, and have stayed with them, not due to any contractual reason – we could go to any fab at any time – we could go to any fab at any time – but because they are best-in-class. It’s about the choices you make.”

What will both AMD and Xilinx get from the deal?

Under this deal, Xilinx shareholders will receive about 1.7 shared of AMD common stock for each share of Xilinx common stock. This puts Xilinx’s share value at USD$ 143 per share, or about 24.8% higher than its USD$ 114.55 closing price on October 26, 2020.

AMD shareholders will own around 74% of the combined company while Xilinx shareholders own the remaining 26%. The companies revealed that the transaction’s original intention was to be a tax-free reorganization for purposes of U.S Federal Income Tax.

Lisa Su of AMD will be leading the combined company as chief executive, with Xilinx’s Victor Peng serving the role of President, responsible for Xilinx’s side of business and initiatives for strategic growth. Both companies expect the deal to generate around USD$ 300 million in cost savings.

Also, on Tuesday; AMD reported earnings before schedule. It reported adjusted earnings and revenue of USD$ 2.80 billion and 41 cents per share, beating Wall Street expectations of USD$ 2.57 billion and 36 cents per share.

What potential hurdles will AMD’s deal face?

For AMD, it does make strategic sense in acquiring Xilinx. However, the deal can face a lot of challenges. AMD only held USD$ 1.8 billion in cash and equivalents at the end of the second quarter, hence it is likely in the need of taking on more debt or fund a large part of the deal in stock.

The rumored price tag of USD$ 30 billion price tag is also equally high for an organization that generated a revenue of USD$ 3.2 billion and USD$ 793 million in net income last year. The deal could however be blocked by regulators, who possibly have no intention to allow these two chipmakers to dominate the Central Processing Unit (CPU) and Field-Programmable Gate Array (FPGA) markets.

Even if the deal is approved, both AMD and Xilinx could find themselves struggling against Intel in the data center market for two reasons:

1. Intel’s Xeon chips still enjoy a reputation of the best breed as the world’s fastest server CPUs.
2. Intel’s Programmable Solutions Group (PSG) business also owns eASIC, a firm that produces customized Application-Scientific Integrated Circuit (ASIC) chips that complement FPGAs in various industries.

Intel is still the only firm that can bundle x86 CPUs, FPGAs, and ASIC chips altogether. AMD however will only be able to offer x86 CPUs and FPGAs, which will lead customers to purchase custom ASIC chips from chipmakers like Marvell.

Hence, AMD may either need to develop ASIC chips by itself or acquire an ASIC chip maker to compete against Intel in the data center business.

Should Intel be paying attention to the deal or ignore it?

AMD’s known interest in Xilinx shouldn’t raise eyebrows at Intel but the company should be following its rivals moves closely. Even if it leaves its ‘data-centered’ businesses exposed to aggressive competition from Epyc CPUs and Xilinx FPGAs, it still should have a look at it.

Moreover, Intel generates over half of its revenue in the previous quarter from its data center business.