AMD to Buy Xilinx; Enjoys Sharp Q3 Sales Growth

AMD AMD reported strong third-quarter results that exceeded our expectations led by PC, server, and game console growth. The firm also announced it will purchase narrow-moat Xilinx XLNX in an all-stock transaction valued at $35 billion. We like the deal for AMD, as it is using its rich shares to fund the deal. Similarly, we’re less fond of the deal for Xilinx shareholders as, in our view, they are receiving less value than what market prices imply. We view this deal as a way for AMD to bolster its product portfolio with the leading FPGA franchise to drive growth and better diversify its revenue, as Xilinx products are complementary to AMD. Xilinx boasts a stellar margin profile with gross margins near 70%, which would be accretive to AMD’s financials. Key end markets for Xilinx include data centers, 5G, infrastructure, and automotive, which collectively would help AMD broaden its reach beyond PC and server CPUs.

All together, we are raising our fair value estimate for no-moat AMD to $67 per share on a probability-weighted basis. We assess AMD’s standalone fair value estimate at $57 per share, up from our prior $31 estimate, as we consider recent 7-nanometer delays at Intel and increase some of our share gain and gross margin assumptions. After reflecting on the potential revenue synergies in the data center and annualized cost synergies of $300 million, our fair value estimate for the combined AMD-Xilinx entity would be $70 per share. We assign a 75% probability of the deal closing and we don’t think there would be any major regulatory concerns (other than a potential roadblock stemming from U.S.-China tensions).

Our probability-weighted fair value estimate for Xilinx is $113 per share. We assign a 75% probability to the value that Xilinx shareholders will receive from AMD of $121 per share (based on our $70 combined fair value times the exchange ratio of 1.7234 shares). The remaining 25% probability stems to our unchanged $90 fair value for standalone Xilinx.

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