AMD Completes $49B Xilinx Acquisition the Largest Chip Deal in History
Deal Overview
Acquirer: Advanced Micro Devices (NASDAQ: $AMD)
Target: Xilinx (NASDAQ: XLNX – Private as of 11/02/2022)
Total Transaction Size: $49bn
Sector: Technology: Semiconductor
Close Date: February 14th, 2022
Acquirer Advisors: Credit Suisse, DBO Partners (Acquired by Piper Sandler)
Target Advisors: Morgan Stanley & Co.
On the 14th of February, Advanced Micro Devices (NASDAQ: AMD) confirmed that it had closed the long-awaited deal to acquire semiconductor and programmable logic device supplier Xilinx (NASDAQ: XLNX – Private as of 11/02/2022) for $49bn in an all-stock transaction, in the industry’s largest ever M&A deal. AMD agreed to pay each Xilinx shareholder 1.7234 shares of AMD for every 1 Xilinx share owned. The deal was first announced in October 2020 and only closed this year due to lengthy regulatory approval timelines. Initially valued at around $35bn, the value of this deal has risen significantly, in line with the increase in the price of AMD stock. The pro forma ownership will see AMD shareholders own 74% of the post-merger company and Xilinx shareholders the other 26%.
AMD Overview
AMD was founded in 1969 and has since grown into a global company with facilities all over the world. AMD offers one of the industry’s largest portfolios of high-performance CPUs, GPUs, FPGAs, Adaptive SOCs and deep software expertise, making them a force to be reckoned with. Since the beginning of 2022, AMD has launched over 30 new products including top-of-the-range processors with the most powerful on-chip graphics available for laptops and over ten new GPUs for both PCs and premium gaming laptops. As it stands, AMD has a market share of 15.97% as of Q2 2022 giving them the fourth largest slice of the pie competing with the likes of IBM, Intel, Nvidia and Qualcomm. AMD has also experienced the largest growth in the last 12 months, growing its market share by just over 4%, far surpassing the growth rate of competitors where only Nvidia come close at a mere 2.5%.
Xilinx Overview
Xilinx was founded in 1984 and develops highly flexible and adaptive processing platforms. Xilinx holds its place as having the strongest portfolio of high-performance adaptive computing products. It’s the inventor of the field-programmable gate array (FPGA) as well as manufacturing the first of its kind – extendable hardware adaptive system-on-chip (SoCs), and the adaptive compute acceleration platform (ACAP). Before its merger with AMD, Xilinx was officially an FPGA company meaning it was in its own niche industry with only one real competitor – Altera (Intel) and held 50% of the market share whilst Altera only had 37%.
Industry Overview
In recent years, the semiconductor sector has established itself as an essential industry providing key components, crucial in the output of products and services within other industries including communications, healthcare, transportation, and defence systems.
Chip shortages over the past years have resulted in staggering production and have bottlenecked innovation within the industry. As a result, Deloitte estimates there was around $500Bn of missed revenue between the semiconductor companies and their customer industries. The industry has struggled to meet demands in recent years as construction and increased production of semiconductors is extremely costly and often require significant time and resources to develop.
The Semiconductor Industry Association announced Q2 2022 sales totalling US$152 billion, an increase of 13.3% over Q2 2021 as well as a 0.5% increase in Q1 2022. Investors are extremely bullish about what the future holds for the semiconductor industry, McKinsey expects growth to continue at a rate of 6-8% up to 2030 (assuming chip supply keeps up with demand) driven by 5G expansion and growing demands for electric vehicles.
M&A activity within the semiconductor industry is currently at an all-time low with only 38 deals totalling US$11.89 Bn having been announced in 2022. This provides a stark contrast to sales numbers as 2022 sales are handily outperforming those of the previous year. Again, optimism is necessary and for good reason, due to the chip shortages in recent years, companies outside of the semiconductor industry are looking for ways to increase chip production. One method that has been adopted is to partner with a firm already in the industry, for example, Dutch car manufacturer Stellantis partnered with Foxconn to design and sell semiconductors for the automotive industry.
The graph above by McKinsey & Co. highlights the projected growth rates for industries relying on semiconductors. The global semiconductor market value is projected to almost double, rising from US$590bn in 2021 to US$1,065 (or US$1.06tn) by 2030, with industrial electronics, automotive electronics and consumer electronics industries experiencing the highest growth percentages.
Revenues within the semiconductor industry are looking extremely optimistic, namely driven by the growing demand for electric vehicles. The powerful synergy between the EV and semiconductor industry could experience what is known as a ‘positive feedback loop’ whereby demand and revenue will keep increasing in a cyclical motion until a ceiling is reached with the technology.
The above diagram is likely to hold true as EV manufacturers progress through the ‘car levels’ assigned by the Society of Automotive Engineers (SAE). The six levels range from ‘SAE Level 0: No automation’ to ‘SAE Level 5: Full automation’, each demanding significantly greater technology. Once full automation is reached, opportunities for the semiconductor industry in EVs will likely slow down. However, an IHS Markit report forecasts that SAE Level 5’s will not be on the market until at least a decade from now.
For now, industry leaders will need to remain focused on R&D, sourcing, and talent retention to reap the full benefits of the opportunities that semiconductors have to offer in the years to come.
Valuation Analysis
We analysed the intrinsic value of Xilinx on its last day of trading, 11th February 2022.
Our WACC was calculated as 9.72%. With interest rates in the US on the rise, we estimated the risk-free rate at 9% (inflation for September 2022 + 1), Xilinx’s Beta was 2.46, and the Cost of Debt was 1.6%.
As mentioned earlier in the article this deal between AMD and Xilinx was announced back on the 27th of October 2020. At that stage, the share price of AMD was $78.88. This valued the implied acquisition price of Xilinx at $135.94 per share.
The low-interest rate environment during the pandemic was particularly favourable for tech stocks, as future cash flows are worth more when interest rates/discount rates are lower. Over the course of 2021, tech stocks soared along with their respective valuations. Semiconductor suppliers were facing a historic supply chain issue with the raw materials needed to produce the chips themselves. In turn, this heavily influenced the implied acquisition price of Xilinx, a well establishes market participant. As of the 14th of February 2022, Xilinx's implied acquisition price per share shot up to $196.93, 44.8% higher than it was in October 2020
Our DCF analysis concludes that Xilinx, as of the 11th of February 2022, was worth around $130.43 per share. This suggests that AMD paid a 33% premium for Xilinx this year. AMD happened to enter into this agreement using equity at a time when semiconductor stocks were reaching all-time highs. "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. However, if you compare this acquisition with Intel’s purchase of Altera in 2015, AMD paid almost 3x as much for Xilinx as Intel did for Altera.
SWOT Analysis & Conclusion
All considered, AMD’s acquisition of Xilinx bears highly promising and lucrative synergies. The diversity of Xilinx’s products and innovative technologies, combined with the resources and brand name of AMD will most definitely create one of the ‘industry’s high-performance and adaptive computing leaders’ – as described by AMD CEO, Dr Lisa Su. Although Margin, EPS, and Cash Flow are all accretive, the complementary nature of the combined entity's intellectual property and technology portfolio makes this deal the largest and most significant in the market. With the rapidly developing technologies across a wide variety of different business sectors such as electric vehicles, 5G telecommunications, and data centre networking, there is no doubt that AMD, can capture a large market share of the ever-growing semiconductor industry.
I hope you enjoyed the article!
See you next month,
Andre & Roman
Disclaimer
This communication is for informational and educational purposes only and should not be taken nor used as investment advice, as a personal recommendation, or solicitation to buy or sell any financial instrument. This material has been prepared without considering any particular recipient’s investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or structured product are not, and should not be taken as, a reliable indicator of future performance. I assume no liability as to the accuracy or completeness of the content of this publication.