By Asa Fitch
A new set of American semiconductor leaders is rising, fueled by
pandemic-driven demand for their chips that they are looking to
parlay into blockbuster deals and disrupt an industry traditionally
dominated by Intel Corp.
The U.S. chip industry has historically been a mix of niche
players, midsize companies and Intel. But this year, Advanced Micro
Devices Inc., long the underdog in the computer-processor market,
and Nvidia Corp., a graphics-processing specialist, are mounting
their biggest challenge yet to level the playing field.
AMD said Tuesday it would buy San Jose, Calif.-based chip maker
Xilinx Inc. for $35 billion. AMD, best known for its
personal-computer processors, is paying for the acquisition in
stock after its shares soared almost 80% this year amid
supercharged demand for videogames, PCs and servers that crunch
data for companies.
Nvidia, whose shares have more than doubled this year, placed
its bet in September by agreeing to buy chip-design specialist Arm
Holdings from SoftBank Group Corp. for $40 billion in cash and
stock, in what would be the industry's largest deal to date. The
transaction would extend Nvidia's reach into the booming smartphone
market where Arm-designed chips dominate.
The AMD and Nvidia transactions -- both still need to pass
regulatory scrutiny in the U.S. and abroad -- would put those
companies on a more even footing with Intel, America's chip-making
icon. AMD Chief Executive Lisa Su said being bigger is an advantage
in a semiconductor landscape where development costs are rising and
customers want more diverse types of chips.
America has other big chip competitors, notably Qualcomm Inc.
and Texas Instruments Inc., both of which have a market value well
above AMD's roughly $93 billion. But those companies largely
compete in different markets: Qualcomm in mobile devices and TI in
analog chips that rely on real-world signals.
The chip industry has been consolidating for years through a
string of mostly smaller deals. But deal activity this year is
shaping up to be unprecedented because stock valuations of some
acquiring companies have soared, giving them financial leverage to
make deals, said Stacy Rasgon, an analyst at Bernstein
"Valuations are high and interest rates are low, and if you're
going to do it, now is probably the time," Mr. Rasgon said.
Investors have rewarded companies catering to the digital
transformation that businesses are undergoing, and that the
coronavirus pandemic has accelerated. Nvidia this year surpassed
Intel as the most valued U.S. chip maker, with a market
capitalization of more than $330 billion, in part reflecting its
edge in chips powering artificial-intelligence processes and a
growing data-center business.
Intel has long been the dominant U.S. chip company. But a series
of manufacturing missteps and more forceful competition could upend
that status, according to analysts and industry officials. Intel
said earlier this year that development of its next generation of
chips had fallen behind. That set it on course to be
technologically behind the world's top-tier semiconductor
Rivals are making inroads as the industry moves away from
Intel's core strength -- powerful processing engines that can do
all types of calculations -- toward chips made for narrower
applications, such as artificial intelligence or
telecommunications, said Alan Priestley, an analyst at research
firm Gartner Inc.
Intel is adapting by developing its own specialist chips. Intel
Chief Executive Bob Swan is trying to move the company from
focusing on dominating the central processing business to having a
large role across broader applications, he said at The Wall Street
Journal's Tech Live conference this month.
Last week, Intel said it was shedding some of its legacy
business -- agreeing to sell its flash-memory-manufacturing
business to South Korea's SK Hynix Inc. for $9 billion -- giving it
firepower to go after new opportunities in 5G networking and
Whether Nvidia and AMD succeed with their costly bids is far
from certain. Some analysts worry that the Xilinx deal might
distract from AMD's focus on gaining market share on Intel. Both
companies also have lots of ground to make up to rival Intel in
revenue. Intel had sales of about $72 billion last year, dwarfing
AMD's $6.7 billion and Nvidia's $10.9 billion.
Regulators and geopolitical tensions also could undo the
proposed deals, as they have in the past. The Trump administration
blocked what would have been the industry's biggest transaction to
date -- the proposed $117 billion hostile takeover of Qualcomm by
rival Broadcom Inc.
But Nvidia and AMD's recent success underlines the advantages of
their business model. They focus on designing advanced chips and
let someone else build them, often chip production specialists such
as Taiwan Semiconductor Manufacturing Co. and Samsung Electronics
Intel, by contrast, designs and builds chips, carrying the heavy
costs that go into building cutting-edge plants. With its recent
struggles, Intel might ask others to produce some of its advanced
chips if in-house plants can't deliver. While its rivals' stocks
are up, Intel's is down more than 20% for the year even as it
expects to post record sales.
AMD has been mounting its biggest assault on Intel's dominance
in more than a decade, driven by new chips that match or beat
Intel's on performance benchmarks. AMD has increased its share of
PC chip sales to more than 17% in the second quarter from about 8%
three years ago, according to Mercury Research. Intel holds
virtually all the rest of the market.
Nvidia, too, has broadened its challenge to Intel under CEO
Jensen Huang. In addition to its plan to buy Arm, it this year
closed the $7 billion purchase of Israel's Mellanox, a high-speed
Consolidation is also gripping other parts of the chip industry.
Analog Devices Inc. in July agreed to pay more than $20 billion for
Maxim Integrated Products Inc. to more forcefully compete with
Intel's most recent major acquisition came two years ago when it
acquired Israeli car-camera pioneer Mobileye NV for $15.3 billion.
It bought mobility app Moovit Inc. this year for about $900
Write to Asa Fitch at email@example.com
(END) Dow Jones Newswires
October 28, 2020 14:35 ET (18:35 GMT)
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