AMD has spent its entire corporate life as a second-class citizen to Intel. That’s just one reason why CEO Lisa Su seized an opportunity with a $35 billion stock deal to snap up programmable chipmaker Xilinx more than a year ago at one of Intel’s weakest moments in decades.
The full extent of a manufacturing stumble that delayed Intel's next-generation chips six months became apparent in 2020, to Su and AMD's considerable advantage. AMD’s share price soared as it became clear the longtime also-ran stood to gain significant market share, granting Su a considerably more valuable currency for acquisitions such as Xilinx, which makes chips for data center networking, cars, military use and satellites.
When the deal was announced in October 2020 AMD expected it to close by the end of 2021, but late last month AMD pushed the expected close date to by the end of March. It will now have to re-file its regulatory paperwork with the U.S. Federal Trade Commission, which has already approved the deal once; China has yet to do so.
For AMD, the purpose of the largest deal in the company’s history is clear: It would immediately add programmable chips to its existing portfolio of graphics and server processors. That’s a potential market of $30 billion, on top of the market of $80 billion in annual sales AMD was already chasing.
Xilinx would also give AMD a significant foothold within a group of products that is essentially controlled by a duopoly — Xilinx and Intel’s Altera — and runs parallel to its other businesses. And, perhaps most importantly, It would make AMD a stronger competitor against Intel for the various pieces of silicon needed to power data centers.
“When you look strategically in the data center, our vision of a very heterogeneous architecture includes a world where you have CPUs, GPUs, FPGAs, ASICs, sort of all connected in the same ecosystem,” CEO Lisa Su said at the JPMorgan Global Technology, Media and Communications Conference last May, according to a transcript from Sentieo. “So bringing that FPGA leadership from Xilinx to the AMD portfolio really gives us a tremendous overall end-to-end portfolio in terms of capability.”
An AMD spokesperson declined to comment on the new timing of the deal, citing the quiet period ahead of earnings.
Bulking up
Absorbing Xilinx would vault AMD into a bigger corporate category, at a moment in the chip industry when size equals survival, because small companies can no longer afford to develop the most advanced chips demanded by the world. Bringing a chip from idea to the point where a manufacturer such as TSMC can produce them at high volume can cost more than $500 million, putting it out of reach for many.
AMD is not in immediate danger; in 2020, the company reported revenue of $3.33 billion for the segment that sells server chips, which includes the chips AMD designs for Sony and Microsoft’s video game systems, and executives have said the company expects overall revenue to rise 65% in 2021. Analysts estimate AMD will record around $16 billion in revenue this year.
Chips, however, are more complicated and expensive to make than ever. And even though Intel is wounded, it is larger by an order of magnitude, and has ways of innovating in its manufacturing operations that are beyond AMD's control as a fabless chip designer. And reinvigorating its manufacturing capabilities are part of Intel’s fresh plan to regain the chipmaking throne; in the past, Intel’s manufacturing prowess allowed it to get away with less-than-perfect designs that still outperformed the competition thanks to its manufacturing leadership.
Intel entered the FPGA business with its acquisition of Xilinx rival Altera for $16.7 billion in 2015, the other competitor in the FPGA duopoly. At the time, the deal’s promise was to contribute FPGAs to Intel’s Xeon server chips, boosting performance. But, Altera hasn’t appeared to help Intel much in the data center market.
According to Mercury Research, as of the third quarter of 2021, AMD’s share gained 3.6 percentage points, which amounted to 10% market share for server chips versus Intel’s 90%. And AMD’s share has been steadily rising for several years.
FPGAs are interesting pieces of hardware. Customers can tweak them as they see fit, which means they are adaptable to new types of computing needs and can receive substantial updates while already deployed in the field. FPGAs also make it faster and cheaper to bring new designs to market compared to other types of processors, which are not easy to program.
What often happens in practice is businesses deploy FPGAs for new computing requirements, and once a design is dialed in — or standards are set — chipmakers will produce application-specific integrated circuits, or ASICs.
FPGAs have downsides, however: Compared with an equivalent ASIC, the programmable processors use considerably more power. And since FGPAs tend to be large, they also need more silicon, which usually makes them more expensive.
“There’s no such thing as a free lunch,” said Stacy Rasgon, an analyst at Bernstein.
Odds of closing
In order to realize Su’s strategy, the deal will have to clear the final regulatory hurdle in China.
Big chip deals that involve China and the U.S. have been tricky for years. Geopolitical tension between the two superpowers can rupture even the most carefully planned acquisitions, such as Qualcomm’s bid for NXP Semiconductors. In China, officials deliberately obfuscate regulatory proceedings, which are complicated by political machinations and strategic calculations beyond what even the most well informed executive or investor is privy to.
As of last week, investors are betting the AMD's bid has roughly a 60% chance of going through, given where the two stocks are trading, according to Roy Behren, chief investment officer of Westchester Capital Management. "A little bit more than a coin toss," he said.
One fear is that the deal may come to resemble Qualcomm’s $44 billion bid for the Dutch auto chipmaker NXP. Qualcomm eventually walked away from the takeover attempt in 2018 after Chinese regulators dragged their feet for years, neither approving nor denying the deal outright. Qualcomm announced the NXP acquisition in 2016, ahead of Donald Trump’s election to the presidency. It likely fell victim to the trade war that followed, though China has denied that was the case.
And the political tension with China hasn’t improved much in the intervening years. VLSIresearch president Risto Puhakka told Protocol it’s unlikely AMD’s bid will be successful, citing that tension.
“They may get lucky if the Olympics go really well and Xi [Jinping] is happy for two days and they are able to squeeze the deal through,” Puhakka said.
Not everyone shares the negative outlook. Behren says AMD’s Xilinx bid is quite a bit different than Qualcomm’s. “The feedback we’re getting is that the process is moving along nicely,” he said, adding that the company has submitted several concessions to China’s State Administration for Market Regulation that were well received.
“From a fundamental perspective it doesn’t appear that there should be an antitrust problem with this transaction,” Behren said.
Still, the process is opaque. Behren pointed to the 18% spread between Xilinx’s stock and the price AMD agreed to pay as evidence that investors were wary that something unexpected could occur and the deal may fall through.
“If you use a February close, it’s over a 180% annualized return, which is ridiculous,” Behren said. “That reflects that the markets are fearful of an unpredictable outcome.”
