By Aron Adamski, BSc Economic @LSE
OVERVIEW OF THE DEAL:
- Announcement date: 27/10/2020
- Industry: Semiconductors
- Implied EV/LTM EBITDA: 35.4x
- Financing: All-share
- Acquirer advisors: DBO Partners & Credit Suisse Securities
- Target advisors: Morgan Stanley & BofA Securities
Advanced Micro Devices entered into an agreement to acquire Xilinx, for $34.7 billion on 26/10/2020. Under the terms of the deal, each Xilinx common stock will be converted into 1.7234 shares of common stock of Advanced Micro Devices, representing 25.4% premium to share price 5 days before deal announcement. Post-closing, current Advanced Micro Devices stockholders will own approximately 74% of the combined company on a fully diluted basis, while Xilinx stockholders will own approximately 26%.
The agreement contains reciprocal covenants by Xilinx and Advanced Micro Devices not to solicit or participate in any discussions or negotiations with any person making an inquiry or proposal for an alternative transaction. Xilinx will be required to pay a termination fee equal to $1 bn if the agreement is terminated because Xilinx’s Board of Directors has changed its recommendation. Advanced Micro Devices will be required to pay a termination fee to Xilinx equal to $1.5 bn if its Board of Directors has changed recommendation. In an event of failure to obtain required regulatory approvals AMD will be required to pay a termination fee equal to $1 bn.
The transaction is subject to adoption of the agreement by Xilinx’s stockholders; approval of the issuance of shares of common stock in the merger by AMD’s stockholders and receipt of any required approvals under the antitrust laws of the US and certain foreign jurisdictions and regulatory approvals. The deal has been approved unanimously by Board of Directors of Xilinx and Advanced Micro Devices.
The transaction is expected to be immediately accretive to AMD margins, EPS and free cash flow generation and deliver industry-leading growth.
The deal is expected to close by the end of 2021.
OVERVIEW OF ADVANCED MICRO DEVICES (AMD):
- Founded in: 1969
- Headquartered in: Santa Clara, California, United States
- Market Cap: £74.9 bn
- EV: £74 bn
- LTM EBITDA: £1.12 bn
- EV/ LTM EBITDA: 66.1x
Advanced Micro Devices is a multinational semiconductor company that develops computer processors and related technologies for business and consumer markets. AMD’s main products include microprocessors, motherboard chipsets, embedded processors and graphics processors for servers, workstations, personal computers and embedded system applications. It serves original equipment and design manufacturers, datacenters, system integrators, independent distributors, online retailers, and add-in-board manufacturers. Its x86 processors are embedded in Playstation and Xbox consoles.
OVERVIEW OF XILINX:
- Founded in: 1984
- Headquartered in: San Jose, California, United States
- Market Cap: £24.1bn
- EV: £23.2 bn
- LTM EBITDA: £734.8 mn
- EV/ LTM EBITDA: 31.34x
Xilinx designs and develops programmable devices and associated technologies worldwide. The company offers integrated circuits in the form of programmable logic devices (PLDs), software design tools to program the PLDs, memory controllers. The company offers its products to electronic equipment manufacturers in sub- markets, such as data center, aerospace and defense, automotive, audio, video and broadcast, and consumer. In 2019 the Data Center and Test, Measurement & Emulation (TME) sectors accounted for 18% of its revenue.
STRATEGIC RATIONALE:
HORIZONTAL INTEGRATION
The merger will create a combined group with 13,000 engineers and over $2.7 bn in annual R&D spending. This will benefit the group in the form of reduced operating costs as well as knowledge transfers as both firms will likely leverage each others’ expertise. AMD said the deal would generate $300 mn in cost savings within 18 months. As result, the firm will be better positioned to compete in a rapidly consolidating chipmaking industry.
CHEAP CURRENCY
AMD’s stock price has risen significantly during the Coronavirus pandemic (see chart below). This growth has been propelled by growth in demand from data centres, PC and game console producers as more people were forced to stay indoors and work, learn and play from home. By paying in stock AMD is taking advantage of their record valuation, enabling it to pull of a strategic acquisition “cheaply”.
DATA CENTRE BATTLE
“The deal marks the next leg in our journey to establish AMD as the industry’s high-performance computing leader and partner of choice for the largest and most important technology companies in the world” ~ Lisa Su, AMD CEO
The global data centre chip market was valued at $7.7 bn in 2017, and is projected to reach $15.6 bn by 2025, registering a CAGR of 9.4% from 2018 to 2025. Although data centres are not the biggest part of Xilinx’s business, their sales are growing fast. In the last quarter revenues rose 30% to make up almost 15% of total sales. The acquisition will create one of the biggest players in this rapidly growing market, challenging the incumbent leader, the Intel Group.
“We have both chosen the data centre as our strategic focus. Our approach to technology development is actually very similar.” ~ Lisa Su, AMD CEO
RISKS AND UNCERTAINTIES
Huawei, one of Xilinx’s clients, has been one of the worst hit companies by the escalating US/China trade wars. As result, Xilinx’s revenue in 2019 fell by 8%, causing the share price to fall by 22%. Hence, one could argue that the deal makes more sense for Xilinx than for AMD. However, despite falling revenues it recorded FCF of $232 mn in 2019, 20% higher than year before. Since it is the business’ ability to generate cash that matters the most the deal seems to make strategic sense after-all.
