Advanced Micro Devices' (AMD 0.69%) planned acquisition of Xilinx (XLNX), originally announced back in October 2020, is finally getting the green light from the last regulatory agency (approval was already granted in the U.S. and Europe). China's State Administration for Market Regulation gave the go-ahead late last week, paving the way for the two companies to merge, which the two semiconductor designers said should be complete by the end of March 2022.
China's regulatory division basically stipulated AMD could proceed on the condition that AMD and Xilinx chips will continue to be made available to China as they have been in the past. In other words, AMD can't require that a Xilinx hardware purchase be bundled with AMD hardware or vice versa.
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This merger is a big deal for AMD, and not just in terms of size (Xilinx currently has an enterprise value of nearly $41 billion as of this writing, compared to AMD's nearly $121 billion enterprise value). Once the acquisition is complete, AMD will enter brand new markets and open up a new front against longtime rival Intel (INTC -1.79%). Here's what shareholders of both AMD and Xilinx need to know.
What happens if you own Xilinx stock?
Here's the skinny if you own Xilinx. You are going to become an AMD shareholder unless you sell before the merger happens. According to the original announcement in October 2020, each share of Xilinx will convert to 1.7234 shares of AMD.
Additionally, Xilinx said on its last earnings release that shareholders of record on Feb. 7 will receive a dividend of $0.37 per share, payable on Feb. 14. This is conditional on the merger not being finished by then (if it is, no dice -- but I don't think everything will be finalized that quickly). This dividend represents a partial return of excess cash to shareholders and will be a roughly $93 million payout based on the last reported share count.
What happens if you own AMD stock?
If you own AMD -- or you plan on owning AMD by holding your Xilinx position and allowing it to convert to AMD stock -- here's what you're getting: the pioneer and leader in FPGA chips (field-programmable gate arrays). Xilinx's hardware designs are a new frontier for AMD, and will launch AMD into end markets where it has little to no presence right now, places like aerospace and defense, automotive, and wired and wireless network infrastructure. Xilinx also has a fast-growing data center business (11% of Xilinx's revenue last quarter, with sales growing a sizzling 81% year over year), which will be highly complementary to AMD's own CPU and GPU data center segment.
Xilinx's chips compete with Intel's PSG (programmable solutions group), which Intel created through the acquisition of a couple of other FPGA companies in recent years. For reference, Intel PSG hauled in $1.9 billion in sales in 2021, up 4% from 2020. Xilinx's last 12-month revenue was nearly $3.7 billion, an increase of 20%. With Intel doubling down on manufacturing right now, AMD could move in further on the chip design front here.
Besides adding in Xilinx's sales, AMD is also getting a highly profitable business. Xilinx's free cash flow margin was 29% over the last year, compared to just 20% for AMD (not including AMD's upcoming Q4 earnings report on Tuesday, Feb. 1). Xilinx also comes into this mega-merger with $2.2 billion in cash and short-term investments net of long-term debt -- complementary to AMD's own $3.3 billion in net cash and short-term investments.
One other important metric is that Xilinx spent just over $1 billion in research and development in the last year. That works out to about 28% of revenue, far higher than AMD's own 14.9% spent on R&D in the trailing 12 months. AMD had said in October 2020 that it foresaw saving $300 million in expenses within 18 months of the merger by combining forces with Xilinx. Perhaps some of that will come from extra efficiency in this research department, but management said most of the savings will come via the cost of goods sold. In other words, AMD and Xilinx will remain highly profitable together without sacrificing on innovation in semiconductor designs.
I liked AMD and Xilinx as stand-alone businesses (full disclosure, I own shares of both), but I like them even more as a team. With China giving the two companies the nod of approval to join forces, we'll get to see soon enough how they chart a course going forward to win over new business in the semiconductor industry.
