Potential AMD-Xilinx Combination Would Turn Up the Heat

On Oct. 8, The Wall Street Journal reported that Advanced Micro Devices AMD is in advanced talks to purchase Xilinx XLNX in a deal that could be worth over $30 billion. With Intel having purchased FPGA peer Altera back in 2015 for $16.7 billion, we view this potential tie-up as a way for AMD to bolster its product portfolio with a leading FPGA franchise to drive growth and better diversify its revenue. Narrow-moat Xilinx boasts a stellar margin profile with gross margins near 70% and operating margins in the high 20s, which would be accretive to no-moat AMD’s financials. Key end markets for Xilinx include data centers, 5G infrastructure, and automotive, which would collectively help AMD broaden its reach beyond PC and server CPUs, comparable with the rationale for Intel’s Altera purchase. Our fair value estimate for AMD remains $31 per share and for Xilinx our fair value is $90. With AMD’s shares trading in the mid-80s, we suspect the firm could finance a potential deal with mostly stock, similar to Nvidia’s pending purchase of ARM.

AMD has done a nice job of cleaning up its balance sheet in recent years, with a cash balance improving to $1.8 billion in the most recent quarter from $1.1 billion at the end of 2018, while total debt is currently $690 million (down from $1.25 billion exiting 2018). Based on recent merger and acquisition deals, we think AMD would have to pay at least $34 billion (about a 30% premium from Xilinx’s market cap of $26 billion prior to the Journal's report). Consequently, the firm could take on additional debt to finance the deal.

We view Xilinx’s products as complementary to AMD’s, and we don’t think there would be any major regulatory concerns (other than a roadblock stemming from the U.S.-China tensions).

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