Advanced Micro Devices Inc (AMD) announced Tuesday it would buy Xilinx Inc in a $35 billion all-stock deal, marking a major challenge to Intel Corp in the semiconductor industry.
According to Reuters, AMD is expected to close the deal in 2021, and it will create a combined company with 13,000 engineers and a completely outsourced manufacturing strategy that relies heavily on Taiwan Semiconductor Manufacturing Co Ltd (TSMC).
Since early this year, the semiconductor industry has witnessed a lot of changes that have intensified competition, forcing chipmakers to up their game in order to grab a market share.
COVID-19 pandemic has opened more opportunities for players in the chip industry through disruption of businesses, creating needs for alternate ways of doing things as the world comes to terms with the new normal.
The semiconductor industry is seeing a surge in consolidation as chipmakers seek scale and expand their product portfolios to support the increasing number of everyday items that are connected to the internet.
But AMD and Intel have a long history of rivalry in the central processing unit (CPU), of personal computer business.
The deal will put more pressure around Intel who has been feeling the heat of competition from Nvidia. Last month, Nvidia and Softbank were in talks for the sale of ARM, a major move Nvidia intends to use to scale up its market share in the chip industry.
But everyone in the industry has a plan to win more market shares or challenge market leaders.
In 2015, Intel executed its largest deal ever, buying Altera Corp for $16.7 billion.
Lisa Su took over AMD in 2014 as chief executive and has since then put up a challenge to Intel in the fast-growing business of data centers that power internet-based applications and services and are fueling the rise of artificial intelligence and fifth-generation telecommunications networks.
Xilinx has also been working to penetrate data centers with programmable processors that help speed up specialized tasks such as compressing videos or providing digital encryption.
Su told Reuters in an interview that the companies are counting on its strong areas to accelerate products into markets.
“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 are 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,” she said.
The combined forces of the two companies will mean more trouble for Intel that has fallen years behind AMD and TSMC. AMD started its factories about 10 years ago, and has since then moved up the ladder with better chips. The market desired-chips of AMD has spurred its performance and increased its market share since 2013, at a little less than 20 percent of the CPU market. The shares have gone up 79 percent this year.
The deal means Xilinx shareholders will receive about 1.7 shares of AMD common stock for each share of Xilinx common stock, valuing Xilinx at $143 per share based on a 10-day average for AMD share prices up to October 8, or about 24.8% higher than its $114.55 closing price on October 26. AMD shareholders will own about 74 percent of the combined firm, with Xilinx shareholders owning the remaining 26 percent.
Under the deal, AMD’s Su will lead the combined company as chief executive, with Xilinx’s Peng serving as president responsible for the Xilinx business and strategic growth initiatives. The companies expect the deal to generate $300 million in cost savings.
Peng said meetings between the two companies have revealed that they have similar methods for designing chips.
“I’ll be honest, I don’t think it’s really as challenging as some other combinations. I had one of my leadership teams who was not familiar with AMD say to me after a meeting, ‘Boy, they’re just like us’,” he said.
Shares of AMD dropped 1.8% shortly after markets opened at 9:30 a.m ET, while those of Xilinx went up nearly 12% after the two companies held a joint conference call about the deal.