AMD Seals $35B Deal To Buy Chip Rival Xilinx; Shares Drop

Advanced Micro Devices has sealed a definitive agreement to snap up rival chip maker Xilinx Inc. in an all-stock deal valued at $35 billion, sending its shares down 2.5% in Tuesday’s pre-market session.

The news of the deal agreement is pushing Xilinx (XLNX) shares up 11%. AMD said that the the transaction will create the industry’s leading computing company, significantly boosting its product portfolio and customer breadth across diverse growth markets. The deal is expected to be immediately accretive to AMD margins, EPS and free cash flow generation, the company said.

Under the terms of the agreement, Xilinx shareholders will receive a fixed exchange ratio of 1.7234 shares of AMD (AMD) common stock for each share of Xilinx common stock they hold at deal closure. Based on the exchange ratio, this values Xilinx at $143 per share and represents a 25% premium to the closing price on Oct. 26. AMD stockholders will own 74% of the combined company on a fully diluted basis, while Xilinx will hold the remainder.

AMD said it expects to generate operational efficiencies of about $300 million within 18 months of the transaction closing, as a result of synergies, shared infrastructure and streamlining measures.

“This is truly a compelling combination that will create significant value for all stakeholders, including AMD and Xilinx shareholders who will benefit from the future growth and upside potential of the combined company,” AMD President Lisa Su said. “The Xilinx team is one of the strongest in the industry. By combining our world-class engineering teams and deep domain expertise, we will create an industry leader with the vision, talent and scale to define the future of high performance computing.”

The deal has been unanimously approved by the Boards of Directors of AMD and Xilinx. AMD expects to close the transaction by the end of 2021 pending approval by AMD and Xilinx shareholders, and regulatory authorities.

While AMD has exploded 79% year-to-date, shares in XLNX are up 17%. Rosenblatt analyst Hans Mosesmann believes the deal makes sense for AMD. The analyst, who has a Buy rating on the stock with a $120 price target (46% upside potential) says that “given Xilinx shares have been relatively distressed” over the past 18 months, the “valuation is actually quite reasonable.”

Considering the industry’s consolidation and shift over the last two years toward AI centered tech, alongside Nvidia’s recent Mellanox acquisition and takeover of UK-based chip designer Arm for a whopping $40 billion, Mosesmann believes the move is one which keeps AMD competitive in a changing landscape. (See AMD stock analysis on TipRanks).

“AMD’s move is strategic and at the same time necessary to counter data center dynamics that a strong CPU and GPU portfolio is not alone enough to stay in the game longer term, Mosesmann wrote in a note to investors. “Xilinx brings exposure, relationships, and secular power for AMD in networking, acceleration (great inferencing positioning) and storage growth vectors, edge strength, and, importantly, diversification into 5G, industrial, and automotive segments that we see adding as much as 50% $TAM for the company.”

Currently, the Street has a cautiously optimistic outlook on AMD. The Moderate Buy analyst consensus is based on 11 Buys, 13 Holds, and 1 Sell. Meanwhile, the average price target of $86.70 implies more modest upside potential of about 5.4%.