AMD is buying rival chipmaker Xilinx for $35 billion as its competition with Intel intensifies

• AMD is buying fellow US-chipmaker Xilinx for $35 billion in a deal expected to close at the end of 2021, it said on Tuesday.
• The deal will create a combined firm with 13,000 engineers and a completely outsourced manufacturing strategy.
• The deal will intensify AMD's battle with Intel Corp in the data-center chip market.
• Both AMD and Xilinx have been able to grab market share from Intel, which has struggled with internal manufacturing.

US semiconductor designer Advanced Micro Devices (AMD) has agreed buy Xilinx, another American chipmaker, in a $35 billion all-stock deal, it said on Tuesday.

The deal, which AMD expects to close at the end of 2021, would create a combined firm with 13,000 engineers and a completely outsourced manufacturing strategy that relies heavily on Taiwan Semiconductor Manufacturing Co (TSMC).

It will intensify AMD's battle with Intel Corp in the data center chip market. Both AMD and Xilinx have been able to grab market share from Intel, which has struggled with internal manufacturing.

AMD has long been Intel's chief rival for central processor units (CPUs) in the personal-computer business. Since Chief Executive Lisa Su took over AMD in 2014, she has focused on challenging Intel in the fast-growing business of data centers that power internet-based applications and services.

Read more: Wall Street is worried that Intel's disappointing earnings are a sign that its terrible year will only get worse: '2021 seems like a messy year'

Xilinx has also been working to penetrate data centers, with programmable processors that help speed up specialized tasks, such as compressing videos or providing digital encryption.

Its primary rival in the area, Altera Corp, was scooped up by Intel for $16.7 billion in 2015 in what was then Intel's largest-ever deal.

The tie-up comes at a time when Intel's manufacturing technology has fallen years behind TSMC's.

AMD, which spun off its factories nearly a decade ago, has rocketed ahead of Intel with chips that perform better. The performance edge helped AMD gain its best market share since 2013 at slightly less than 20% of the CPU market, which has in turn pushed its shares up 68% between the start of the year and the close of trade on October 26.

Xilinx also uses TSMC's factories to make its chips, with both US companies using modular designs that let them swap out different pieces of a chip to avoid delays.

AMD's Su will lead the combined company as chief executive, with Xilinx CEO Victor Peng serving as president responsible for the Xilinx business and strategic growth initiatives. The companies expect the deal to generate $300 million in cost savings.

AMD also reported earnings on Tuesday earlier than scheduled. It reported revenue and adjusted earnings of $2.80 billion and 41 cents per share, beating Wall Street expectations of $2.57 billion and 36 cents per share, according to IBES data from Refinitiv.

Bernstein analyst Stacy Rasgon said there was a danger that a major acquisition in an adjacent chip market could distract AMD's leadership while Intel fights to regain market share.

"The worry would be, AMD has this great self-grown story of their own, which is just starting to play out. Why are you doing this now? Is it just opportunistic? Does it distract from the current story?" he said.

Xilinx's Peng, however, said meetings between the two companies have already revealed they have very similar methods for designing chips.

"I'll be honest, I don't think it's really as challenging as some other combinations," he told Reuters. "I had one of my leadership teams who was not familiar with AMD say to me after a meeting, 'Boy, they're just like us.'"

Reporting by Stephen Nellis and Munsif Vengattil for Reuters