AMD agrees to buy Xilinx for $ 35 billion in the latest effort to take on rival Intel. Your stock is falling.

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Advanced Micro Devices said early Tuesday that it had reached an agreement to acquire semiconductor maker Xilinx for $ 35 billion.

The acquisition could be transformative for AMD (ticker: AMD), giving it more resources and new lines of business to better compete with its larger rival Intel (INTC), especially with chips designed for data centers and other cloud computing applications. .

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The all-share deal values ​​Xilinx at roughly $ 143 a share, which is a 25% premium over Monday’s closing price. It is expected to close in late 2021. AMD said the deal would benefit the company’s margins, earnings per share and free cash flow generation. The company said it expects to achieve operating efficiencies of $ 300 million within 18 months of closing the deal.

“Our acquisition of Xilinx marks the next leg in our journey to establish AMD as the industry leader in high-performance computing and the preferred partner of the world’s largest and most important technology companies,” said AMD CEO. , Lisa Su. Xilinx CEO Victor Peng would join AMD as chairman and two Xilinx directors would join AMD‘s board.

The Xilinx acquisition would add several new chips to AMD‘s portfolio, including so-called Field Programmable Gate Arrays, or FGPAs, that can be reprogrammed after manufacture, unlike other chips. FPGAs are useful with emerging technology, such as 5G infrastructure, which does not have a pool of pre-existing microprocessors designed for use. Intel is the other major competitor, entering the FPGA business in 2015 with its acquisition of Altera.

Xilinx also manufactures chips for automotive and aerospace applications, among other industries. It has been affected by geopolitical tensions between China and the US.

The AMD-Xilinx deal comes amid the consolidation of the semiconductor industry. Last month, rival graphics processing unit maker Nvidia said it planned to acquire Arm Holdings from SoftBank Group.

for $ 40 billion in cash, stocks, and future considerations. Last week, Intel said it was transferring its flash memory business to SK Hynix.,
a company from South Korea.

The AMD-Xilinx deal could also pose risks for the two companies. When reports surfaced earlier this month that the companies were discussing a deal, RBC Capital Markets analyst Mitch Steves wrote that the risks include weakening Xilinx’s business relative to investor expectations and that Su had not made a large-scale acquisition before. At $ 30 billion, or $ 75 to $ 95 a share, Steves called the deal expensive.

In addition to the acquisition, AMD also announced third-quarter earnings ahead of Tuesday’s opening bell, teasing its expected announcement by a few hours.

The chipmaker reported third-quarter net income of $ 390 million, or 32 cents a share, compared with a profit of $ 120 million, or 11 cents a share, a year ago. AMD posted non-GAAP earnings of 41 cents a share. The company reported revenue of $ 2.8 billion, up from $ 1.8 billion a year ago. Analysts had forecast adjusted earnings of 35 cents a share and revenue of $ 2.56 billion.

The company’s core computing and graphics segment posted sales of $ 1.67 billion, compared to Wall Street‘s estimate of $ 1.55 billion. The company said sales were supported by strong growth in its Ryzen chips, which partially offset lower graphics revenue.

“Our business accelerated in the third quarter as strong demand for our PC, gaming and data center products generated record quarterly revenue,” Su said.

The company’s enterprise, integrated and semi-personalized business generated revenues of $ 1.13 billion. AMD said the segment’s growth was driven by sales of Epyc chips and an increase in its semi-custom business, which produces the chips that power Sony.

and Microsoftis
new video game consoles, to be released next month. Analysts expected sales of $ 1.01 billion.

AMD shares fell 3.5% to $ 79.33 in early trading on Tuesday. Its shares are up nearly 80% this year. Xilinx shares have gained 17% in 2020, while the PHLX Semiconductor Index is up 25%.

Write to Max A. Cherney at max.cherney@barrons.com