Challenging NVIDIA! AMD plans to invest $4.9 billion to acquire AI data center equipment company ZT Systems

AMD announced on Monday that it plans to acquire ZT Systems, a company specializing in designing cloud computing and artificial intelligence data center equipment, for $4.9 billion, challenging NVIDIA's dominant position in the AI computing field.

According to media reports, the transaction will be completed through a combination of cash and stock. AMD plans to pay 75% of the acquisition price to ZT Systems in cash, with the remaining portion to be paid in stock, including a conditional payment of up to $400 million, which will be made after certain milestones are reached post-acquisition.

Analysts believe that the demand for artificial intelligence computing requires tech companies to interconnect thousands of chips into clusters to achieve the necessary data processing capabilities. Interconnecting a large number of chips together means that the composition of the entire server system becomes increasingly important, which is also the reason for AMD's acquisition of ZT Systems. AMD hopes that by acquiring ZT Systems, it can provide a wider range of chips, software, and system design products to large data center customers like Microsoft and Meta, promising to enhance performance through the tight integration of these products.

Headquartered in Secaucus, New Jersey, ZT Systems was founded in 1994 and is currently privately held. The company designs and manufactures servers, server racks, and other infrastructure to accommodate and connect chips in giant data centers that support AI systems like ChatGPT.

Financial reports show that the company's annual sales exceed $10 billion, nearly half of AMD's reported revenue of $22.7 billion last year. However, AMD plans to sell ZT's manufacturing business after the acquisition and retain its system design business.

AMD CEO Lisa Su stated that the greatest value of ZT to AMD is the ability to provide more direct assistance to customers in building massive data center clusters for training AI systems. The addition of ZT Systems engineers will enable AMD to test and launch its latest AI GPUs faster to meet the needs of large cloud computing companies like Microsoft.

"This allows me to say to customers, let me help you build the next training cluster, tell me what you think is important. I now have a very large design team that can help you do this," Su said.

AMD expects the transaction to be completed in the first half of next year, subject to regulatory approval, and anticipates an additional 12 to 18 months to sell the manufacturing business. ZT CEO Frank Zhang will continue to serve after the acquisition and report to AMD's data center head Forrest Norrod. Zhang stated that joining AMD will help ZT "play a greater role in defining the AI infrastructure of future computing."

Analysts believe that this transaction may enhance AMD's competitiveness against NVIDIA, which has been actively expanding its data center products in recent years. For example, NVIDIA acquired networking company Mellanox for nearly $7 billion in 2020, bringing supercomputing-level data transmission capabilities and helping it maintain an advantage in the AI boom. In addition, NVIDIA is increasingly focusing on server and data center design In recent years, AMD has also taken other measures to strengthen its data center capabilities, including acquiring chip maker Xilinx in 2022 through an all-stock transaction valued at nearly $50 billion. Also in 2022, AMD acquired data center chip and networking startup Pensando Systems for $1.9 billion.

While NVIDIA has been the main beneficiary in the chip industry during the AI boom, AMD is also making progress. After exceeding analysts' expectations in quarterly performance last month, AMD raised its forecast for AI chip sales this year to $4.5 billion, up from the $3.5 billion forecast in January.

The ZT deal is one of AMD's largest transactions since the acquisition of Xilinx and the $5.4 billion acquisition of ATI Technologies in 2006. Last month, AMD announced a smaller AI-related transaction, acquiring Silo AI for approximately $665 million. Silo AI, headquartered in Finland, helps customers integrate artificial intelligence into their products and operations.

Following the news of the acquisition plan, AMD's stock rose 2.45% to $152.20 during Monday's trading session.