AMD announced on Monday that it plans to acquire server manufacturer ZT Systems for $4.9 billion, aiming to strengthen its portfolio of artificial intelligence (AI) chips and hardware in a bid to compete with Nvidia. The deal will be funded 75% in cash and the rest in stock, utilizing a portion of AMD’s $5.34 billion in cash and short-term investments as of Q2.

The increasing demands of AI computing require tech companies to connect thousands of chips in clusters, making server systems’ design more critical, which is why AMD is acquiring ZT Systems. AMD CEO Lisa Su emphasized that “AI systems are our number one strategic priority” and mentioned that ZT Systems’ engineering team will help AMD scale its AI GPUs faster for cloud computing giants like Microsoft. Su added that the acquisition would primarily boost GPU sales.

AMD’s shares gained over 2%, while Nvidia’s rose by 1.4%. Creative Strategies CEO Ben Bajarin noted that this acquisition strengthens AMD’s position with its data center customers and is positive for its long-term revenue strategy.

Post-acquisition, AMD plans to divest its server manufacturing business, as it does not intend to compete with companies like Super Micro Computer. Discussions with potential buyers have not yet started. ZT Systems’ CEO Frank Zhang will join AMD, reporting to the data center chief, Forrest Norrod. ZT Systems, a privately-held company with about 2,500 employees, generates around $10 billion in annual revenue, mainly from its manufacturing unit. AMD intends to retain about 1,000 employees, leading to approximately $150 million in annual operating expenses.

The deal is expected to close in the first half of 2025, with AMD planning to sell the manufacturing business within 12 to 18 months post-closing. The acquisition is projected to contribute to AMD’s adjusted financial performance by the end of 2025. CFO Jean Hu stated that the deal would initially result in minor dilution in 2025, but increased GPU sales would offset this, creating a break-even effect. By 2026, the acquisition is expected to accelerate revenue growth.

According to Kinngai Chan, managing director at Summit Insights, selling the ZT Systems manufacturing business will have no long-term impact on AMD and could help the company expand its cloud customer base. Nvidia CEO Jensen Huang had previously mentioned that Nvidia, once a chip designer, now offers entire data centers and components, with its data center segment expected to generate $105.9 billion this year. Last month, Su revealed that AMD expects to earn about $4.5 billion in AI chip revenue in 2024, with major customers including Microsoft and Meta Platforms.