Xilinx Tries to Make Most of Spotlight Amid Chip M&A Surge

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– Xilinx Inc. Chief Executive Officer Moshe Gavrielov is trying to take advantage of increased interest in his company since Intel Corp. said it would acquire his main rival in the programmable logic-chip market for $16.7 billion.

The purchase of Altera Corp. by the world’s biggest chipmaker has helped validate the argument that Xilinx’s products have broader appeal outside of telephone-network equipment, where they’ve mainly been used, Gavrielov said in an interview. What Xilinx needs to do now is make it easier for potential customers to use the chips, whose function varies according to how they are programmed in software.

“I couldn’t buy PR like this, everyone’s talking about FPGAs,” said Gavrielov, who took the top job at the San Jose, California-based company in 2008.

Field programmable gate array chips -- a long abbreviation even for an industry that’s riddled with them -- can be tuned to very specific uses, replacing more-expensive, custom-built chips. Yet their broad adoption has been slower than their makers predicted because of the difficulty in programming the devices.

“The biggest opportunity for us is to expand the markets we serve. The biggest inhibitor is that today it requires very specialized engineers,” Gavrielov said. “In order to address that, we have leadership technology, which is software. It’s the ease of use that’s the biggest issue.”

Record Year

With Intel’s purchase -- in a record year for chip industry deals -- Xilinx is heading toward becoming the main independent provider of FPGA technology. Its challenge is to convert interest by data-center operators and makers of cars, industrial equipment and medical equipment into volume orders. And now it’s competing with a company that spends about five times more on research and development than Xilinx has in annual revenue.

“They have good products and they do get design wins, they just don’t ramp in volume,” said Ian Ing, an analyst at MKM Partners. “They’re at an existential point where they’re going to have to figure out what their role is.”

Xilinx shares declined 1.9 percent to close at $43.97 in New York amid a global selloff in light of the Greek financial crisis. The company’s stock is up 1.6 percent this year, compared with a 1.3 percent decline by the Philadelphia Stock Exchange Semiconductor Index.

While Xilinx has increased its gross profit margin to close to 70 percent, sales growth has been limited. Revenue was $2.38 billion in the fiscal year through March, little changed from a year earlier as Xilinx faced uneven demand for phone-system components.

Gavrielov said Xilinx will be helped more than harmed by Altera becoming a division of Intel, which acquired programmable-chip capabilities to help it in the market for data-center semiconductors. For Xilinx, opportunities in data centers will depend on the success of others in taking a chunk out of Intel’s 99 percent and increasing market share, he said. While that will be tough, the use of programmable chips in data centers remains in its early stages and the field provides about 5 percent of Xilinx’s sales.

Partners’ Motivation

Meanwhile, Xilinx manufacturing partners such as Taiwan Semiconductor Manufacturing Co. and processor designer ARM Holdings Plc now have more incentive to help Xilinx as they compete directly with Intel, Gavrielov said.

Xilinx has been approached by bankers looking to forge the next deal as the industry consolidates amid rising costs and a shrinking number of customers, he said. While the company will give thorough consideration to any offer, he’s focused on not allowing Xilinx to be distracted by mergers.

“We believe we have delivered leadership and we have the path forward to continue to do that and to continue to grow our business as a stand-alone company,” he said.

(Updates with closing share price in eighth paragraph.)
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