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What To Make Of AMD's Acquisition of Xilinx

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Advanced Micro Devices (AMD - Free Report) officially announced its plan to buy competing chip maker Xilinx (XLNX - Free Report) following its Q3 earnings release this morning. The deal was released as an all-stock $35 billion acquisition, which would add to the tidal wave of semiconductor consolidation that we have seen in this unprecedented year.

Tech remains steaming hot in the face of a highly controversial election and a resurging pandemic that could drive the global economy back into a tailspin. The world needs the latest technology to fully function in the self-isolating society that COVID-19 has caused. With chips at the heart of almost everything we use, it's no question why well-positioned stocks in this segment have been taking off.

2020 has already seen some of the most significant mergers in chip history with Analog Devices' (ADI - Free Report) $20.9 billion all-stock acquisition of Maxim Integrated (MXIM - Free Report) , which was greenlit by investors early this month.

Nvidia (NVDA - Free Report) is in the midst of closing a $40 billion deal (roughly 50% in stock) for Soft Bank's (SFTBY - Free Report) Arm Holdings. This deal will be the largest in semiconductor history if it can get past the regulatory bodies involved, including China (which could cause some problems).

The AMD + XLNX Deal

AMD claims that this acquisition would immediately improve the combined business margins, cash flows, and EPS. The combined enterprise would be worth $135 billion. AMD doesn't expect that this deal to close until the end of 2021.

According to AMD's press release this morning, "the combination will create the industry's leading high performance computing company, significantly expanding the breadth of AMD's product portfolio and customer set across diverse growth markets where Xilinx is an established leader."

"Our acquisition of Xilinx 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," AMD President and CEO Dr. Lisa Su said.

AMD has been gradually taking CPU market share from the chip pioneer, Intel (INTC - Free Report) , who recently lost its competitive edge. Intel's antiquated in-house manufacturing has catalyzed its fall behind the innovative curve. AMD and its partnership with the cutting-edge Taiwan Semiconductor Manufacturer Co (TSM - Free Report) , which has thrusted this company's market share & stock price to continuously new highs, pushing Intel further into obsolescence.

AMD and Xilinx will be working together to further penetrate the massive data center market, which has been exploding with cloud-computing, the 5G revolution, and the rise of artificial intelligence (AI). Xilinx's high-performance programmable chips and key relationships will help the combined business further penetrate the proliferating data center market.

Management expects to see $300 million in cost synergies within the first 18 months of close.

Should You Buy In?

Today AMD is down over 4% on the acquisition news and profit pulling from investors who saw what they wanted in its September quarter earnings this morning. This is a natural investor reaction for an acquiring company that has surged over 65% this year and is paying a lofty 25% premium for this seemingly expensive acquisition.

XLNX is up 8.5% today but has fallen since open with shares of AMD. I expect these shares to track together until the deal is finalized in what is estimated to be late 2021. I would be hesitant to buy into either of these stocks at their currently rich valuations.

AMD released its quarterly earnings today, and it illustrated a big beat on both top and bottom-lines. It wasn't enough to keep investors enthusiastic at this current valuation level. The XLNX acquisition adds to the uncertain future of this innovative chip maker.

Final Thoughts 

Expect to see more consolidation in the chip space as the necessity for scale, portfolio diversity, and groundbreaking innovations become evident in this increasingly competitive space. Next week's highly controversial election and the recent resurgence in the global pandemic are sure to throw a wrench in market action.

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