U.S. semiconductor industry consolidation gains pace with another landmark transaction
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 pandemic.
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 an agreement.
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.
When you look at where the markets are going in the future, I think scale matters _Lisa Su, AMD chief executive
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 Inc.
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.
Xilinx shares rose more than 8% in early Tuesday trading. AMD fell more than 4%.
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 meshed well.
Customers, she said, increasingly want a variety of computing engineschips that specialize in artificial intelligence, for example, or networkinginstead of jack-of-all-trades chips. And chip development costs are rising, which gives the competitive edge to those with larger checkbooks.
AMD has steadily gained market share against Intel in recent months, reaching almost a fifth of the market for PC central processors in the second quarter, according to Mercury Research figures. It has also been gaining share in CPUs that go into servers.
The Xilinx deal, Ms. Su said, wouldn’t distract AMD from that business. AMD will win further market share, she said, adding that the companies together would have more products and a longer list of customers that they could sell to together. Xilinx’s relationships with telecom equipment giants Samsung Electronics Co. and Ericsson AB, for example, could open up a previously untapped $5 billion market to AMD’s data center processors, she said.
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.
Xilinx would also give AMD a foothold in areas where it is 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 are also commonly used in superfast 5G network infrastructure.
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. AMD promises $300 million in cost savings from the combination within 18 months.
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 2015.
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 share.
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.
AMD said it expects to have about $3 billion in sales in the current quarter, also ahead of Wall Street expectations.
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.