AMD to buy Xilinx for $35 billion in stock, offers rosy earnings forecast

Advanced Micro Devices Inc. announced Tuesday morning that it plans to acquire Xilinx Inc. in an all-stock deal valued at $35 billion, confirming recent speculation.

AMD AMD, also delivered an early release of its third-quarter financial results, which had been due to come out after the closing bell. The company delivered adjusted earnings per share of 41 cents on revenue of $2.8 billion, up from 18 cents and $1.8 billion, respectively, a year earlier. Analysts surveyed by FactSet had been expecting 35 cents in earnings per share and $2.56 billion in revenue.

Shares of AMD are off 3.5% in morning trading Tuesday, while shares of Xilinx are up 9%.

AMD said in a release that the Xilinx XLNX, deal “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.”

The company expects the combination to be “immediately accretive” to margins, earnings per share, and free-cash flow and anticipates that the deal will close by the end of calendar 2021. AMD also expects the deal to generate operational efficiencies of about $300 million within the first 18 months after the transaction closes. These synergies will primarily materialize in cost of goods sold, shares infrastructure, and “streamlining common areas.”

Xilinx shareholders will get a fixed exchange ratio of 1.7234 shares of AMD’s common stock for each share of Xilinx’s common stock that they own. The exchange ratio implies about $143 per share for Xilinx’s common stock. Xilinx shares recently changed hands just below $125.

Baird analyst Tristan Gerra wrote that the deal looks like a “neutral” move in the near term for AMD. “However, accretion starting in 2022 would be timely given our expectation for a slowdown in AMD’s market share gains in both PCs and data center starting next year,” he wrote. Gerra doubts AMD will be able to change Xilinx’s revenue growth rate in the medium term.

He has a neutral rating and $70 target price on AMD shares.

For the third quarter, AMD reported $1.67 billion in revenue for its computing and graphics segment, up 31% from a year earlier, and $1.13 billion for its enterprise, embedded, and semi-custom segment, up 116%.

Chief Executive Lisa Su said on AMD’s earnings call that the company saw record quarterly client-processor and server-processor revenue. Ryzen processor sales “more than offset” lower sales in graphics, Su said. In servers, she pointed to expanded AMD processor deployments from large hyper scale partners.

The company expects fourth-quarter revenue of $2.9 billion to $3.1 billion, whereas analysts tracked by FactSet had been modeling $2.6 billion.

AMD’s results and forecast suggest that the company is picking up share at the expense of Intel Corp. INTC, , according to Raymond James analyst Chris Caso, and Intel shares are down about 2% in Tuesday’s session.

AMD’s outlook, which implies 7% sequential revenue growth, stands “in sharp contrast to Intel’s report, which demonstrated sharp datacenter weakness, and suggests that share loss was certainly a contributor to Intel’s weak results,” Caso wrote. He has a market perform rating on AMD’s stock.

See more: Intel data-center sales drop more than expected

AMD shares have added 15% over the past three months as the S&P 500 SPX, has risen 5%.