Yet Another Semiconductor Deal: a brief look at AMD and Xilinx

(Jordi Brown, Jack Boswell, Jaahnavi Sikand)

Introduction

AMD is a California-based firm that designs computer processors, both for the consumer and business markets. The processors AMD designs include central processing units (CPUs) – which are responsible for executing instructions; graphical processing units (GPUs) – which process images and video; and accelerated processing units (APUs) – which combine both a CPU and GPU on one chip.

AMD has expressed interest in acquiring Xilinx, which is also a California-based technology firm that also develops processors. Xilinx’s products are not aimed at consumers – instead, they deliver generalised circuits to places like data centres, and those businesses program the circuits themselves.

Context

AMD’s acquisition comes at a time when several other deals in the tech space are taking place. AMD’s big rival in the CPU market is Intel, who are looking to streamline their core business by selling off its memory storage business.

In the GPU space, AMD’s biggest rival is Nvidia. Previously, we’ve reported on Nvidia’s potential acquisition of ARM.

Both AMD and Xilinx are publicly traded companies on the NASDAQ. AMD has enjoyed a 58.8% increase on its stock price since the beginning of this year. Potential factors to point at could include Intel’s announcement of a delay on its next generation of chips and both Microsoft and Sony including AMD chips in the new PlayStation 5 and Xbox Series X respectively.

Source: https://uk.finance.yahoo.com/quote/AMD?p=AMD

The coronavirus pandemic has had a moderate impact on the semiconductor industry, with 63% of Global Semiconductor Alliance members who responded to a KPMG survey stating they had suffered at least some supply chain shortages. However, COVID-19 could also have a positive impact on the adoption of 5G and the Internet of Things (IoT).

The Deal

The acquisition of Xilinx by AMD comes when there has been a large frenzy of acquisitions from the multiple big chipmakers as these firms compete for dominance of the 5G and the emerging cloud computing sectors; total takeovers reaching $100 billion this year.

AMD and most tech corporations have benefited from a surge in stock prices this year, AMD’s share price rising by 50% in the last six months and growth stocks climbing by more than 25 per cent this year. Also, AMD has had a great year this year, producing the chips for the new Xbox and PS5 and benefiting from changes in consumer activity from the pandemic, these factors contributing to growth in AMD’s revenue of 56% in Q3.

 

Source: Yahoo Finance 

AMD and Xilinx both have similar technological departments, both with a large focus on data centres. The combined company will be able to serve more and larger customers, helping AMD fight with Intel for an increased market share of the data centre market. The two combined companies would tap into a potential consumer base exceeding $110bn and an estimated cost saving of around $300 million over the next 18 months. The close technological compatibility of these two companies would make it easier to integrate and combine their technologies, allowing AMD to focus on its core CPU chip business.

The acquisition would give data centre companies a greater range of products. Xilinx produces a specialised type of chip known as FPGAs, these act as accelerators to speed up the training of neutral networks used for deep learning.

However, AMD still has a lot of work to do to achieve its vision of being a key player in the data centre market. Only 14% of Xilinx’s sales in the last quarter were data centre customers and the firm plays a small role in GPUs. The fight for the data centre market could distract AMD from its core CPU market. 

Prediction and Outlook

The unanimous approval by the Board of Directors for the acquisition of Xilinx by AMD, makes it increasingly likely that the deal will be agreed. Shareholders from both firms are yet to approve the acquisition, but the combined performance of the companies that will encourage optimal efficiency (AMD, 2020) and allow for growth across markets, makes this transaction profitable for investors and makes it probable that this deal will close by the end of 2021. However tensions amongst China and the US has raised the likelihood of China rejecting a similar transaction in the field between Nvidia and Arm and this could pose a problem for AMD as well (Levy, 2020). Although the risk levels are not as high for the AMD-Xilinx transaction, the approval of this deal will depend on the future relations between China and the US.

The deal is still to undergo regulatory approval and there may be some mild concerns of the rejection of the acquisition by the competition authorities. Xilinx has a primary focus on FGPA (essential programmable chips) and is one of the biggest players in this field, only in competition with Intel. The acquisition of Xilinx will greatly increase AMD’s market share by eliminating a rival and enable them to surpass Intel within the semiconductor industry. This may not be favourable for the CMA and could affect the agreement of this deal however so far there has been no evidence to suggest that there have been any real regulatory concerns.

Our prediction is that the acquisition of Xilinx by AMD is very likely to go ahead, with the tensions between China and the US being minor concerns. The transaction in itself is likely to carry some risk as the $35 billion price tag is high and AMD have no longstanding history with successful acquisitions, but the larger market impact is positive with the innovation prospects that this deal will provide.

Glossary

Internet of Things (IoT) – The adding of chips to devices that typically wouldn’t have them and connecting them to the Internet – for example, washing machines or coffee makers.

References

KPMG, 2020. https://advisory.kpmg.us/articles/2020/impact-of-covid-19-on-semiconductor-industry.html. [Online]
Available at: https://advisory.kpmg.us/content/dam/advisory/en/pdfs/2020/impact-of-covid-19-on-semiconductor-industry.pdf
[Accessed 11 November 2020].

Nuttall, C., 2020. Chip deals set for record year. [Online]
Available at: https://www.ft.com/content/9847edf4-9cd1-4024-a81d-353d473b4dba
[Accessed 11 November 2020].

White, E. & Waters, R., 2020. Intel to sell Nand memory unit to SK Hynix for $9bn. [Online]
Available at: https://www.ft.com/content/21c4f05c-787e-4f3f-add8-4e629cebd660
[Accessed 11 November 2020].


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