AMD, Xilinx complete world's biggest semiconductor merger thanks to stock boom

The effect of Ryzen share prices

AMD has officially taken over FPGA maker Xilinx in what is, thanks to rising share prices, the biggest acquisition in the history of the chip industry.

The x86 processor giant completed the all-stock $49bn takeover of Xilinx on Monday. In 2020, AMD announced it had agreed to acquire the company in a deal back then worth $35bn, pending approval. The last hurdle was getting the OK from the Chinese government, which wrapped up earlier this month.

“It was an all-stock deal and AMD and Xilinx values rose,” Patrick Moorhead, principal analyst at Moor Insights & Strategy, told The Register. AMD confirmed the final value of the acquisition.

AMD just happened to buy Xilinx at a time semiconductor stocks are soaring to record highs. The change in stock prices added a 40 per cent premium to the deal. Xilinx's share price went from just over $115 in October 2020 to $194 on February 11. AMD's increased from $75 back then to $114 today. According to the terms of the merger, Xilinx stockholders will receive 1.7234 shares of AMD common stock for each share of Xilinx common stock they hold.

"In some sense, it's hard to consider it as an overpayment; AMD didn't have the cash and thus needed to use equity. That's the risk you take with equity," said David Kanter, a chip analyst at Real World Technologies, told The Register.

PHLX Semiconductor Sector, a weighted semiconductor stock index that includes 30 top publicly listed chip companies, temporarily breached 4,000 late last year after hovering at 1,200 around the time the pandemic broke. The index was hovering at 3,339 on Monday, down around 0.2 per cent from the previous market close.

COVID's silver lining

The pandemic has been a financial bonanza with increased digitization sparking an unprecedented demand for chips in data centers, cars, electronics and more, Ruben Roy, senior analyst for semiconductors & emerging technologies at stock analysis firm WestPark Capital, told The Register.

There’s a lot of cash flowing in the silicon world, and historically even chip companies with bad operating margins and cash flow are doing well, Roy said. “This is a point in the semiconductor industry where you're going to see some of the value that they bring to the table, they're going to get paid for it,” he explained.

Xilinx has enjoyed a solid financial performance. The FPGA biz banked record revenues totaling $1.01bn in its most recent financial quarter, growing by 26 per cent year-over-year, and the GAAP-based earnings per share was $1.19 per diluted share, up 73 per cent on the year.

It remains to be seen if, in the long term, AMD overpaid for Xilinx based on bloated chip stocks. The acquisition works out to close to three times the $16.7bn that Intel paid for FPGA house Altera in 2015 and the combined operation remains one of the top FPGA makers.

There will always be down cycles for chip companies given the volatile nature of the semiconductor industry, but chip makers are more important to driving critical infrastructure, and there is demand for a more diverse set of chips than ever before, Roy said.

AMD’s acquisition – bringing together more than 15,000 engineers under one corporate roof – comes as large chip deals become hard to consummate with political and economic pressures. Nvidia last week walked away from a $66bn deal to buy out Arm after regulators objected. Arm is now opting to go public.

Companies are focusing instead on tuck-in acquisitions to fit specific needs, and which are easier to close. For example, FPGA maker Lattice bought Mirametrix, which provides data sets for applications that include eye-tracking and gaze detection data, which the company can bundle along with its chips to automobile and electronics makers.

The hangover approaches

IC Insights is projecting semiconductor sales to be around $680bn this year, growing by 11 per cent from 2021. It’ll be the third consecutive year of double-digit growth since 1993-95, when PCs and DVD players drove double-digit growth. The growth could hit a down cycle in 2024, but then grow again in the following years.

“2024 can be called a correction. Happens all the time in this cyclical industry. Boils down to supply and demand. The industry cycle has historically been a three to-five-year cycle,” Brian Matas, analyst at IC Insights, told The Register.

AMD’s $49bn gamble on Xilinx provides an opportunity to a “larger share of the approximately $135bn market opportunity” in the cloud, edge and intelligent devices, according to CEO Lisa Su. AMD is paying about 37 per cent of the total market opportunity to buy Xilinx.

The Ryzen processor giant will use Xilinx to grow in data centers, which is where the most semiconductor dollars are spent. The company already is succeeding with its Epyc server processors and GPUs, though Xilinx will provide a foothold in areas AMD isn’t well established, which include telecoms, automotive, and industrial equipment, Drew Prairie, an AMD spokesman, told The Register.

All of those markets are shifting to the edge computing model, where FPGAs are being used for their flexibility to address a wide range of AI workloads and other tasks that need specialist hardware acceleration. Being programmable logic, FPGAs can also be easily reconfigured to take on a new workload, and are being used on the edge of 5G networks. Xilinx adds a “broader portfolio of technologies and new assets and products for networking, adaptive workloads and AI that round out our capabilities,” Prairie said.

AMD has slipped Xilinx into a new unit called Adaptive and Embedded Computing Group, which will be led by former Xilinx CEO Victor Peng. Su will also be made chair of AMD's board as well as CEO. ®