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Bram de Haas
Bram de Haas
Articles (457)  | Author's Website |

AMD's Xilinx Deal Offers a 10.02% Expected Annualized Return

A review of the deal between two promising US chipmakers

Advanced Micro Devices (NASDAQ:AMD) is set to acquire Xilinx, Inc. (NASDAQ:XLNX) in an all-equity deal. Better known by its acronym AMD, the chipmaker is offering 1.7234 of its shares for each share of Xilinx.

Personally, I've been looking at this deal for a few weeks now as the rumors intrigued me. The deal seemed to be very well received by analysts on the conference call where it was announced. Executives on both sides sounded like they were genuinely excited.

Xilinx CEO Victor Peng even said he's all-in and has to make the integration work, which sounded like an improvised and unprepared remark. AMD's CEO Lisa Su is widely revered after leading the company to a remarkable comeback over the past few years.

I was curious how Su would rationalize or sell the deal, and it seems she sees growth for Xilinx's hallmark FPGAs. This is a special type of chip that is different from the GPU, CPU or memory most people are familiar with. It is a very flexible and customizable chip that is most attractive outside of mass-market standard applications. To learn more about this technology, I've interviewed ex-AMD and ex-Xilinx engineer Philip Freidin here. I have also included the video at the end of this article.

Su is guiding for a 20% compound annual growth rate (CAGR) for the combined company. The deal is highly accretive on earnings per share (EPS) and free cash flow (FCF) per share because AMD trades at very high multiples. According to management, it is taking market share from Intel (NASDAQ:INTC) at a very rapid pace in some of its niche areas, and its GPU's are doing really well against the backrop of the growth of AI with a tailwind of cryptocurrency mining thrown in. To get there, the company projects $300 million in synergies, but if they can get to the 20% the deal is likely a steal.

Su believes Xilinx is the ideal match for AMD. Something that really soothed my concern is that she specifically stated not to be interested in M&A for M&A's sake. Historically, she has not been interested in M&A, and AMD hasn't done any significant deals before this one under her leadership. Su calls out a number of Xilinx's strong points:

  • Xilinx's powerful business model
  • The long life cycle for its chips
  • Strong industry partnerships

Interestingly, Freidin highlighted all of these features to me when I interviewed him about the deal rumors. On the conference call, AMD expected there's a $30 billion total available market (TAM) for Xilinx out there. Xilinx has over 50% market share currently.

Tough questions came out later in the conference call when analysts asked about the failed acquisition of Altera Corp. by Intel. Altera is Xilinx's main competitor, and so far nothing astounding has come out of the deal.

Su and Peng believe this is a different story. They believe their businesses are much more complementary, especially in terms of product and market segments. Both are working with Taiwan Semiconductor Manufacturing (NYSE:TSM). The companies also both work with modular designs. Meanwhile, Xilinx is a leader in 2D and 3D die integration, something I think could help with a CPU/FPGA integration. They also hint there are synergies under the cover.

This acquisition is set to be completed around the end of 2021. That's a long way off. Going by my model, the deal will likely close sooner, but some semi or tech deals can get caught up in regulatory quagmire. Ultimately, this is what resulted in the failed Qualcomm (NASDAQ:QCOM) acquisition of NXP (NASDAQ:NXPI) a few years back.

Name acquirer Name target Target ticker Acquirer ticker gross spread expected annualized return Days remaining until close estimated closing probability Break price
Advanced Micro Devices, Inc. Xilinx, Inc. XLNX AMD 9.54% 10.02% 360 97.80% 100.00

Table: author's model

It is an equity deal, which means you can hedge out the AMD risk. These deals are less vulnerable to overall market risk. The worst-case scenarios are where AMD becomes the target of an acquisition and that acquirer doesn't want the deal to go through.

In my model, I've assumed I get to a 10% annualized return. That's based on 360 days to close, with a closing probability of 97.8% and a break price of $100 (which is on the high side, but I believe management genuinely wants to close here).

On Oct. 27, the deal spread closed somewhat. It has now expanded already as of Oct. 28. I didn't like it at an 8% spread, but it is getting better at 9.14% currently, which translates to a 10% expected annualized return.

That's a bit too low for me to buy. It is not that I find 10% unimpressive, but because the deal is all-equity and less susceptible to market tantrums, I would personally prefer to use a bit of leverage to get me to a satisfactory return. I'm keeping an eye on this deal , and if the spread widens just a little bit more, I might consider making a move.

Disclosure: currently no position or plans to take one, but reserve the right to buy Xilinx and short AMD in the near future.

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About the author:

Bram de Haas
Bram de Haas is managing editor of The Special Situations Report and Founder of Starshot Capital B.V.

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