On August 19 2024, US-based semiconductor giant Advanced Micro Devices (AMD) announced its purchase of the AI infrastructure firm ZT Systems for $4.9bn. This acquisition is the "next major step" for AMD, following $1bn of investment towards its AI capabilities in the last 12 months. Evidently, the firm has aspirations to become the market leader in producing AI chips, seeking to dethrone NVIDIA. The target, ZT Systems, succeeds in providing hyperscaling services to computing firms through the integration of AI infrastructure. If AMD is to dethrone NVIDIA, its ability to mass-produce AI chips will be pivotal and this deal is centered around improving that ability to scale.
This transaction, set to finalise in H1 2025, comprises of 75% cash ($3.7bn) and 25% ($1.2bn) in AMD stock. Around 1,100 software engineers are set to join AMD from ZT Systems, this additional pool of talent is undoubtedly one of the most beneficial additions from the deal for AMD. Moreover, with a greater, talented, workforce, AMD can boost its R&D efforts and drive innovation within the firm.
On the day of announcement, AMD's share price rose 4.5% to $156.40, reflecting positive sentiment and confidence in the deal's impact on AMD's ability to deliver value to shareholders. ZT Systems is not a publically traded company.
Lisa Su, AMD's president & CEO, exclaims the firm's intention to divest the manufacturing business of ZT Systems, which is one of its leading income streams (ZT Systems generates about $10bn annually). This is because AMD wants to avoid competing with its own customers in the server stack production market. Su has also emphasised that AI systems are AMD's "number one strategic priority" which could explain the ambition to part with this division of ZT Systems. If this divestment occurs, AMD should be able to recieve a sizeable chunk of the $5bn price it paid for ZT Systems. With deal activity picking up in H1 2024, assuming growth continues, the manufacturing business of ZT Systems could be a valuable target for AMD's competitors. As of yet, no firm has shown interest in the asset.
AMD has signalled to the public through this merger, as well as recent investments, that it intends to challenge NVIDIA for the top spot in the AI revolution. This addition of ZT Systems escalates the competition vertically, from exclusively in the production of chips, to include data centres, AI, and high-performance computing. Currently, NVIDIA boasts a market capitalisation of $2.93tn to AMD's $240bn; AMD certainly have an uphill journey to challenge the behemoth NVIDIA has become in recent years. Analysts have argued that AMD is "behind" on the capabilities it needs to succeed in the AI market against NVIDIA. Inorganic growths such as mergers may be what AMD needs to catch up to NVIDIA, who have not acquired any billion-dollar companies yet this year.
Whilst the aspiration to dethrone NVIDIA is ambitious, at the very least AMD has further entrenched itself as a prominent player in the technology market. It is in a strong position to continue to deliver cutting-edge technology to its client base. If AMD can persist with its investment strategy and intensify the competition further, only then would the dethroning of NVIDIA be realistic in the near future. This deal is one of many growths, both organic and inorganic, required to take the hotly contested number-one spot in technology.
Alexander Philp
Sources: MergerLinks, Yahoo Finance, AMD, CapIQ
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