Today, AMD announced they are acquiring ZT Systems for $4.9 billion.  This move is highly strategic, as AMD looks to go from full stack to full rack as the basis of competition in the AI server market continues to change and a much more vertical approach than ever is needed.

Key Takeaways

• AMD has announced plans to acquire ZT Systems for $4.9 billion.
• Key points of the acquisition include:
  • Gaining ZT Systems’ expertise in designing and optimizing cloud computing solutions
  • Accelerating deployment of AMD-powered AI infrastructure at scale
  • Strengthening AMD’s ability to deliver end-to-end data center AI infrastructure
• The acquisition aims to address a projected $400 billion data center AI accelerator market opportunity in 2027
• This move highlights the importance of fully integrated systems, which go beyond just the rack computer, but extend to networking, switches, storage, and advanced cooling techniques
• With this acquisition, AMD increases its lock-in/build-in potential with data center customers.

The entire basis of data center design is changing thanks to the shift from traditional servers to AI servers. As I detailed in this analysis, entirely new approaches to design are required as all data center infrastructure is being reimagined to solve new problems that emerge with the increased power/cooling needs of AI servers.

ZT Systems is a key supplier and designer of data center solutions for all merchant silicon vendors, including Intel, Nvidia, etc., and how AMD handles this side of the business will be interesting to watch as it provides some degree of counter-intuitive competition. CEO Lisa Su indicated they would divest this area, acknowledging it is a low-margin business but even that can be tricky and will require precision execution.  It appears, that business will be offloaded via reference designs, or potentially sale to other ODMs to manufacture racks for AMD competitors.

While AMD sees this as an investment in supporting their scale as well as taking more vertical approaches to this now full-rack solution, it will be interesting to see how the hyper scalers view this when it seems more of them are favoring their designs, own custom silicon, and see their ability to design more efficient data centers as a key competitive advantage of their own.  On paper, the premise of going from full stack to full rack sounds good but in some cases, it may be counter to how the biggest hyper scalers in the world choose to design their spaces and keep a degree of autonomy to not get stuck in any single vendor lock-in. That said, there is clearly a shift to a more homogeneous systems-design approach happening within merchant silicon competitors in the data center. This move from AMD only underscores this continued direction.

Key Context From Management

Below are some comments from AMD CEO Lisa Su that add additional context to the acquisition and AMD’s goals.

• Strategic alignment with AMD’s AI roadmap:
  Lisa Su stated: “Our acquisition of ZT Systems is the next major step in our long-term AI strategy to deliver leadership training and inferencing solutions that can be rapidly deployed at scale across cloud and enterprise customers.”
• Enhancing AMD’s capabilities:
  Su mentioned: “ZT adds world-class systems design and rack-scale solutions expertise that will significantly strengthen our data center AI systems and customer enablement capabilities.” 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 of cloud computing giants such as Microsoft Su.
• Building on previous investments:
  Su noted: “This acquisition also builds on the investments we have made to accelerate our AI hardware and software roadmaps.”
• Ecosystem integration:
  Su explained: “Combining our high-performance Instinct AI accelerator, EPYC CPU, and networking product portfolios with ZT Systems’ industry-leading data center systems expertise will enable AMD to deliver end-to-end data center AI infrastructure at scale with our ecosystem of OEM and ODM partners.”
• Focus on scale:
  Su repeatedly mentioned scale in her comments, emphasizing “rapidly deployed at scale” and “end-to-end data center AI infrastructure at scale.”

View From the Street on The Deal

Here’s a summary of the investor Q&A with key sentiment analysis and highlights of Lisa Su’s responses:

Key Investor Sentiment:

• Cautiously optimistic: Investors showed interest in the strategic benefits but sought more clarity on financial details.
• Concerned about financial specifics: Multiple questions probed for more precise figures on revenue, margins, and the value of manufacturing assets to be divested.
• Curious about competitive positioning: Investors were keen to understand how this acquisition positions AMD relative to competitors, especially Nvidia.

Relevant Discussion Point From the AMD Investor Call

1. Open Ecosystem and Innovation: Lisa emphasized that AMD remains committed to open standards and an open ecosystem. The acquisition is seen as additive, helping to deploy large-scale clusters faster without replacing existing open ecosystem solutions .
2. AI Strategy and Capabilities: She highlighted that the acquisition aligns with AMD’s AI strategy, enhancing their ability to offer optimized systems to cloud companies and OEM/ODM partners. This includes leveraging AMD’s leadership in CPU, GPU, and networking technologies .

1. Accretion and Revenue Growth: Lisa mentioned that the acquisition is expected to be accretive by the end of 2025. The revenue from service support and additional GPU sales is anticipated to offset any minor dilution from the transaction .
2. Manufacturing Business Sale: She confirmed that AMD will seek a strategic partner to acquire ZT Systems’ manufacturing business post-transaction, which is expected to be classified as held for sale and reported as discontinued operations .

1. Comparison with Nvidia: Lisa stated that AMD’s investments in AI hardware, software, and now systems capabilities position them strongly, potentially even better than competitors in some areas. She emphasized the significant performance improvements in their ROCm software stack, which in some cases surpasses competitors .
2. Networking Capabilities: She noted that the acquisition would help AMD optimize their networking solutions, which is crucial for large-scale AI deployments. The addition of ZT Systems’ engineers, who have expertise in connecting large-scale AI clusters, will be beneficial .

1. Leadership and Team Integration: Lisa confirmed that key leaders from ZT Systems, including CEO Frank Zhang and President Doug Huang, will join AMD and play significant roles in the integration and future operations .
2. Customer Enablement: She emphasized that the acquisition will enable AMD to provide a stronger foundation for their customers, allowing for faster deployment of technology and giving customers more choice in optimizing their systems .

1. Market Perception: Lisa clarified that AMD will continue to work with OEM and ODM partners, providing them with optimized reference designs to bring to market faster. This approach is intended to enhance the adoption of AMD solutions without taking away customer choice .
2. Long-term Growth: She reiterated that AI is AMD’s #1 strategic priority and that the acquisition of ZT Systems is a significant step in their long-term AI strategy. The goal is to deliver leadership AI solutions that can be rapidly deployed at scale across cloud and enterprise customers .

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