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Xilinx (XLNX) Rallies 14% as AMD Reportedly Eyes Acquisition

Xilinx XLNX shares rallied more than 14% last Friday after The Wall Street Journal (WSJ) reported that Advanced Micro Devices AMD is interested in acquiring the field-programmable gate arrays (FPGAs) chip maker.

Citing people familiar with the matter, the business-focused news agency reported that the two companies are in advanced talks and a deal could be finalized as soon as this week. The WSJ further noted that Xilinx could agree to get takeover in a deal that could be worth $30 billion, reflecting a 16% premium to the stock’s Oct 8 closing price.

Why AMD Intends to Buy Xilinx?

The two companies are so different to each other that the deal makes sense in our view. Advanced Micro is specialized in making microprocessors that are used to power game consoles, personal computers, and servers. Meanwhile, Xilinx makes FPGAs chips that can be reprogrammed, and are majorly used in the communications, data center, industrial and defense applications.

Considering the expertise of both companies in different areas, the acquisition would help Advanced Micro fortify its presence across new markets. The transaction will also provide it arsenal to better compete with its arch rival Intel INTC which entered in the FPGAs solution space through the acquisition of Altera for $16.7 billion in 2015.

Furthermore, both companies are now focusing on enhancing their market share in the fast-growing data-center market. Advanced Micro is making strides in the data-center space with its second-generation EPYC processors, which is helping it gain huge market share in the x86 servers industry.

Xilinx is also pushing itself hard to strengthen its foothold in the data-center market. In the last few years, the company has launched several Alveo artificial intelligence (AI) accelerator cards, which it claims provide high-performance for data-center applications, including real-time machine learning, video processing, genomics, and data analytics.

The performances of Xilinx’s AlveoAI accelerators are considered as powerful as of NVIDIA’s NVDA data-center graphic processing units (GPUs). Therefore, the buyout would provide Advanced Micro another way to compete with NVIDIA.

Consolidation Continues in Semiconductor Industry

The Semiconductor industry is undergoing a massive consolidation wave. A huge number of mergers and acquisitions worth hundreds of billion dollars have taken place over the last few years.

Consolidation is natural in a mature industry like semiconductor which is now more than 60 years old. This industry is currently plagued with two huge challenges, which include escalating costs of producing chips for devices and a sluggish growth rate.

In such a scenario, semiconductor companies need to be huge in order to compete effectively. Therefore, these companies have resorted to mergers and acquisitions in an effort to grab more market share, cut costs, boost productivity and improve investment returns through scale economies.

During the second quarter of 2020, the industry witnessed more two major mergers and acquisitions which have a combined worth of more than $60 billion. In July, Analog Devices ADI agreed to acquire Maxim Integrated Products MXIM in an all-stock deal worth $20.9 billion. The transaction, which is expected to complete in summer 2021, will be accretive to Analog’s earnings and provide cost synergies.

Last month, NVIDIA entered into a definitive agreement to buy the U.K.-based Arm Holdings in a deal valued at $40 billion. The transaction is anticipated to be immediately accretive to the graphic chip maker’s gross margin and earnings.

For Advanced Micro and Xilinx merger, it is still a wait and watch story. Currently, AMD carries a Zacks Rank #3 (Hold), while Xilinx has a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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NVIDIA Corporation (NVDA): Free Stock Analysis Report
 
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