Advanced Micro Devices (NASDAQ: AMD) will acquire rival Xilinx (NASDAQ: XLNX) in a $35 billion all-stock transaction that sees the chipmaker making its biggest push yet to challenge Intel (NASDAQ: INTC) in the data center market.
The deal is expected to close at the end of 2021, and though it builds on each chip company's outsourced manufacturing capabilities, a leaner strategy than that deployed by Intel, it also introduces an element of risk because both AMD and Xilinx rely heavily upon Taiwan Semiconductor Manufacturing (NYSE: TSM) for their fab needs.
Driving the internet's future
Under the purchase agreement, Xilinx shareholders will receive 1.7234 shares of AMD for each share they own of Xilinx, which equates to $143 in cash, a near 25% premium to the chipmaker's closing price yesterday.
AMD shareholders will own about 74% of the combined company, which will end up with 13,000 engineers, while Xilinx shareholders will own the remaining 26%. AMD says the deal will increase its total addressable market to $110 billion.
What it's really looking at is taking on Intel in the fast-growing data center business, which fuels internet-based services and applications. In AMD's just-announced third quarter earnings report, the chipmaker said demand for its data center products, along with PCs and gaming solutions, drove revenue 56% higher in the period to $2.8 billion, more than doubling net income to $501 million, or $0.41 per share.
In its earnings report last week, Xilinx said data center revenue jumped 23%, increasing its contribution to 14% of revenue from 12% a year ago.
TSM makes all of Xlinx's advanced products for data centers, while AMD says TSM makes a broad selection of its products based on its 7 nanometer process, and if TSM was unable to, it would materially impact AMD's business.
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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Taiwan Semiconductor Manufacturing. The Motley Fool recommends Intel and Xilinx. The Motley Fool has a disclosure policy.
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