Advanced Micro Devices (NASDAQ:AMD) will acquire rival Xilinx (NASDAQ:XLNX) in a $35 billion all-stock transaction that sees the chipmaker making its biggest push yet to challenge Intel (NASDAQ:INTC) in the data center market.

The deal is expected to close at the end of 2021, and though it builds on each chip company's outsourced manufacturing capabilities, a leaner strategy than that deployed by Intel, it also introduces an element of risk because both AMD and Xilinx rely heavily upon Taiwan Semiconductor Manufacturing (NYSE:TSM) for their fab needs.

Glowing chip on motherboard

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Driving the internet's future 

Under the purchase agreement, Xilinx shareholders will receive 1.7234 shares of AMD for each share they own of Xilinx, which equates to $143 in cash, a near 25% premium to the chipmaker's closing price yesterday.

AMD shareholders will own about 74% of the combined company, which will end up with 13,000 engineers, while Xilinx shareholders will own the remaining 26%. AMD says the deal will increase its total addressable market to $110 billion.

What it's really looking at is taking on Intel in the fast-growing data center business, which fuels internet-based services and applications. In AMD's just-announced third quarter earnings report, the chipmaker said demand for its data center products, along with PCs and gaming solutions, drove revenue 56% higher in the period to $2.8 billion, more than doubling net income to $501 million, or $0.41 per share.

In its earnings report last week, Xilinx said data center revenue jumped 23%, increasing its contribution to 14% of revenue from 12% a year ago.

TSM makes all of Xlinx's advanced products for data centers, while AMD says TSM makes a broad selection of its products based on its 7 nanometer process, and if TSM was unable to, it would materially impact AMD's business.

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