Xilinx Could Be a Cheap Way to Play AMD, Thanks to the Merger Arbitrage Spread

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Stylized render of AMD Ryzen RPO Mobile Processor inside a laptop

Courtesy AMD


is trading at a significant discount to the value of the takeover offer from

Advanced Micro Devices

after a Reddit-aided run-up in AMD shares.

Given the wide spread,


could offer a cheap way to play AMD, although the deal awaits regulatory approval in China, and that isn’t certain in a climate of worsening relations with the U.S.

While the arbitrage spread tightened on Thursday, it remains wide, with Xilinx (ticker: XLNX) trading at a 23% discount to the current value of the AMD (AMD) offer. Xilinx shares were up $5.32, to $149.95, on Thursday, and AMD was off $5.51, to $113.26. The deal spread has narrowed to about $45 from $61 a share Wednesday.

AMD is offering 1.7234 of its shares for each Xilinx share in the all-stock deal. There were rumors earlier Thursday that the deal will get China’s approval. AMD is aiming to close the deal — initially valued at $35 billion– by the end of 2021.

   AMD has surged recently after strong results for its June quarter reported in late July as well as bullish buzz on Reddit message boards. AMD stock is up 24% since July 27, when it reported its second-quarter earnings of 63 cents a share, 9 cents better than the consensus. The deal spread stood at $25 per share that day.

   On AMD’s earnings conference call on July 27, CEO Lisa Su said: “Turning to our Xilinx acquisition. We passed additional milestones in the quarter and received unconditional regulatory approvals in multiple jurisdictions, including in the EU and the UK. We remain on track to close this strategic transaction by the end of the year and are excited about the opportunities ahead.”

AMD wasn’t immediately available for comment, but a company spokesman told industry publication EnterpriseAI in early July:  “China is the primary regulatory approval still required. We have filed our transaction with China’s State Administration for Market Regulation (SAMR). We continue working with Chinese regulators and remain on-track for approval by year’s end.”

Arbitrage investors seek to weigh the potential downside if the deal falls apart against the potential upside.

Before AMD announced the transaction in October 2020, Xilinx was trading around $106 a share and AMD at $83. If Xilinx were assumed to fall back to $106 if the deal breaks, that would be a drop of about $44 a share, against a gain of $45 if the deal occurs. That would imply odds of the deal closing of about 50%.

But given the rally in semiconductor stocks since last October, with the

iShares Semiconductor

exchange-traded fund (SOXX) up about 50%, the downside in Xilinx probably is more limited. That could make for a favorable risk/reward now in Xilinx shares.

Write to Andrew Bary at andrew.bary@barrons.com

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