#177 Why Did AMD Pay $4.9 Billion For ZT Systems? A Deep Dive
Fresh & Hot curated AI happenings in one snack. Never miss a byte 🍔
This snack byte will take approx 4 minutes to consume.
Why Did AMD Pay $4.9 Billion For ZT Systems? A Deep Dive
Advanced Micro Devices (AMD) has announced a $4.9 billion acquisition of ZT Systems, a server and data center hardware company. Surprisingly, AMD has no plans to enter the server business. And I had never heard of ZT systems before (my ignorance)
But guess what? This acquisition seems to align with AMD’s strategy to boost its competitiveness in the rapidly growing AI market.
ZT Systems, which generated over $10 billion in revenue over the past year, will mark AMD’s second-largest deal to date, following the $35 billion acquisition of Xilinx in 2022.
However, AMD isn’t interested in the hardware side of ZT Systems’ business.
The chipmaker plans to sell off ZT’s manufacturing arm after the deal closes, keeping its sights on the company’s 1,000 top-tier design engineers. (such deals, aka “aqui-hires” are becoming commonplace now, where a company acquires another company to lay their hands on only its resources and employees. This allows them to navigate around some of the tougher antitrust regulations and policies)
These engineers possess expertise in key areas such as motherboard, power, thermal, networking, and rack design, which are critical to AMD’s future in AI and data center solutions.
AMD CEO Lisa Su emphasized the importance of this acquisition, noting that ZT Systems will significantly strengthen AMD’s capabilities in developing advanced AI solutions. In a call with investors, Su highlighted the goal of leveraging ZT Systems’ talent to enhance AMD’s product design without directly competing in the server manufacturing space.
This "acqui-hire" approach, which essentially values the team and their expertise over the physical assets of the company, has already been met with positive reception from Wall Street.
AMD shares surged by 4.5% following the announcement, signaling investor confidence in AMD’s strategic direction.
While AMD’s AI chip business is growing rapidly, it remains a smaller player in comparison to Nvidia, the current leader in AI systems. Nvidia’s dominance can be attributed to its ability to offer more than just chips—it provides complete AI systems that are highly integrated and optimized for data centers.
Nvidia’s Hopper systems, a flagship AI product, consists of 35,000 parts and weighs 70 pounds, providing an all-in-one solution for customers.
In response, AMD has launched its own AI system, the MI300, which has helped the company double its data center sales to $2.8 billion in Q2 2023. However, this is still a fraction of Nvidia’s anticipated $25 billion in data center sales for the same period.
Industry analysts are viewing AMD’s acquisition of ZT Systems as a way to broaden its AI product offerings.
AMD’s AI systems are currently being used for “easier, low-scale use cases” in AI data centers, freeing up Nvidia’s systems for more demanding applications. The ZT deal will help AMD expand the range of use cases for its products, making it a stronger competitor in the AI space.
By selling off ZT Systems’ manufacturing business, AMD will avoid potential conflicts of interest with its own customers, such as Dell and Super Micro, who purchase AMD chips for their server products. Retaining the manufacturing arm could have led to AMD directly competing with these companies, which would have introduced complications.
Also, the server hardware business is notorious for its thin profit margins, particularly in the highly competitive AI market.
Super Micro, for example, reported record-low gross margins for Q2 2023, and Dell experienced a sharp drop in operating margin for its AI server business segment during its fiscal quarter ending in April. By offloading the hardware side, AMD can shield itself from these challenges while maintaining a focus on higher-margin products like AI chips.
In fact, AMD's trailing 12-month gross margin of 51.2% is more than double that of Dell and Super Micro over the same period, according to S&P Global Market Intelligence data. This margin strength is partly due to the success of AMD’s AI systems, which have been key to the company’s recent growth.
The acquisition of ZT Systems represents a significant investment in AMD’s future, particularly in the AI space.
By focusing on expanding its design capabilities and offering more complete AI systems, AMD is trying to position itself to better compete with Nvidia in the race to dominate AI data centers.
While absorbing the cost of 1,000 new engineers from ZT without the accompanying revenue from hardware sales presents a risk, AMD is betting that these design experts will help the company unlock much greater growth potential in the coming years.
Ultimately, its the people that count!