The U.S. stock market was generally weaker on Tuesday, but that didn't stop the Nasdaq Composite (NASDAQINDEX:^IXIC) from posting gains. As we've seen on several occasions in the past, optimism about the growth prospects for top stocks in the technology sector has played a key role in lifting the Nasdaq even when the rest of the stock market has been on the decline. That was the case today, as the Nasdaq was up almost 0.75% at 3:30 p.m. EDT with the Dow and S&P 500 both down on the day.
The big news of the day among Nasdaq stocks was that Advanced Micro Devices (NASDAQ:AMD) has decided to move forward with plans to acquire programmable chip specialist Xilinx (NASDAQ:XLNX). The massive deal will create a juggernaut in the semiconductor arena and position the post-merger AMD as a force to be reckoned with as the 5G wireless-network upgrade cycle begins in earnest.
A long time coming
If you have a sense of deja vu reading about Xilinx and AMD, don't worry -- you're not imagining things. The two companies were rumored earlier this month to be in talks to merge, and those rumors had been enough to send Xilinx's share price significantly higher at the time.
At the time, market participants speculated that AMD might have to pay as much as $30 billion in order to win Xilinx. Yet the move was crucial from a strategic standpoint. Semiconductor chip arch rival NVIDIA (NASDAQ:NVDA) had made a strategic acquisition of its own, buying the Arm Holdings division from Softbank. In order to keep pace, AMD had to look at ways that it could match NVIDIA's move and keep up its extremely strong upward momentum.
Yet, when some time passed, investors got more uncertain about whether a deal would ever actually happen between the two tech companies. Xilinx held onto most of its share-price gains, but a slow creep lower signaled some disappointment among those who had hoped for a tie-up with a bigger semiconductor chip company .
Getting a deal done
In the end, the estimates of a $30 billion price tag for Xilinx proved to be too low. The final price of the all-stock buyout of the programmable chip maker turned out to be closer to $35 billion.
Xilinx shareholders will receive 1.7234 shares of AMD for every Xilinx share they own. Based on where the two stocks started the day, that amount valued Xilinx at almost $142 per share, or a 24% premium to the tech company's closing price Monday.
As often happens in an all-stock merger, though, the two stocks moved in different directions. AMD shares were down 4% late Tuesday afternoon, while Xilinx jumped nearly 9%.
For AMD, the benefits are pretty clear. Xilinx's programmable chips are extremely valuable commodities right now, especially as companies begin to build out upgraded 5G wireless networks. In addition, picking up Xilinx will enable AMD to compete more effectively against rival Intel (NASDAQ:INTC) in the data-center market. Both AMD and Xilinx have cited data centers as a notable growth arena for their respective businesses in recent quarterly reports.
If the deal passes through all the usual regulatory hurdles and closes in late 2021 as expected, then AMD will suddenly be a dominant player in a market with an estimated value of more than $100 billion. That's a big step for a company that used to be a perennial also-ran in the microprocessor market.