By Max A. Cherney
(Reuters) -AMD said on Monday it plans to acquire server maker ZT Systems for $4.9 billion as the company seeks to expand its portfolio of artificial intelligence chips and hardware and battle Nvidia (NASDAQ:NVDA).
AMD (NASDAQ:AMD) plans to pay for 75% of the ZT Systems acquisition with cash and the remainder in stock. The company had $5.34 billion in cash and short-term investments as of the second quarter.
The computing requirements for AI have dictated that tech companies string together thousands of chips in clusters to achieve the necessary amount of data crunching horsepower. Stringing together the vast numbers of chips has meant the makeup of whole server systems has become increasingly important, which is why AMD is acquiring ZT Systems.
"AI systems are our number one strategic priority," AMD CEO Lisa Su said in an interview with Reuters.
The addition of ZT Systems engineers will allow AMD to more quickly test and roll out its latest AI graphics processing units (GPUs) at the scale cloud computing giants such as Microsoft (NASDAQ:MSFT) require, Su said.
"The main way (ZT Systems) is additive to the company is we sell more GPUs," Su said.
AMD's shares rose more than 2%, while Nvidia rose 1.4%.
"No doubt this gives them much stronger lock-in with their data center customers, and because of that,(the acquisition) is a net positive for their long-term revenue strategy," said Creative Strategies CEO Ben Bajarin.
AMD plans to break off its server manufacturing business and sell it once the deal closes, as it has no plans to compete with companies such as Super Micro Computer (NASDAQ:SMCI), Su said.
AMD has not yet held talks with potential buyers.
ZT Systems Chief Executive Frank Zhang will join AMD and report to AMD's data center chief, Forrest Norrod.
The closely-held ZT Systems has roughly 2,500 employees and AMD said it plans to retain about 1,000 of them, which will result in about $150 million in annualized operating expenses.
Currently ZT Systems generates annual revenue of roughly $10 billion, most of which is derived from its manufacturing unit.
Executives expect the deal to close in the first half of 2025 and expect an additional 12 to 18 months to sell the manufacturing business.
AMD said it expects the deal to contribute to its adjusted financial performance by 2025-end.
CFO Jean Hu said the minor dilution from the deal in the first year after closing in 2025 would be offset by greater sales of graphics processor units, creating a break-even effect for the deal. In 2026, the acquisition will accelerate revenue growth, Hu added.
"The sale of the (ZT Systems) manufacturing business will have no impact onto AMD in the long run," said Kinngai Chan, a managing director at Summit Insights.
Chan added the deal could help expand its business catering to cloud customers. "Having more engineers helps," he said.
Nvidia CEO Jensen Huang said at the company's developer conference in March that the one-time chip designer now creates and sells entire data centers, or the individual components needed to build one. This year analysts expect the company to generate $105.9 billion from its data center segment, which includes chips and other AI hardware.
Su said last month the company expects to collect roughly $4.5 billion worth of AI chip revenue this year. The company's customers include Microsoft and Meta Platforms (NASDAQ:META).