AMD announced intent of acquiring server vendor ZT Systems for $4.9 billion in order to broaden its range of artificial intelligence processors and gear and compete with Nvidia.

AMD intends to pay for 75% of the ZT Systems acquisition in cash, with the remaining in stock. The company's cash and short-term investments totaled $5.34 billion as of the second quarter.

The computational needs for AI have required tech companies to cluster thousands of processors to get the requisite level of data-crunching horsepower. Stringing together such large numbers of processors has made the composition of entire server systems increasingly crucial, which is why AMD is purchasing ZT Systems.

"AI systems are our number one strategic priority," AMD CEO Lisa Su stated in an interview with Reuters.

According to Su, the acquisition of ZT Systems experts would help AMD to more swiftly test and roll out its newest AI graphics processing units (GPUs) at the scale that cloud computing giants like Microsoft demand.

"The main way (ZT Systems) is additive to the company is we sell more GPUs," Su told me. AMD's stock surged more than 2%, while Nvidia's rose 1.4%.

"No doubt this gives them much stronger lock-in with their data center customers, and because of that,(the acquisition) is a net positive for their long-term revenue strategy," Ben Bajarin, the CEO of Creative Strategies, said.

AMD intends to spin off its server manufacturing company and sell it after the transaction is completed, since it has no intention of competing with competitors like Super Micro Computer, according to Su.

AMD has not yet held discussions with possible purchasers.

ZT Systems CEO Frank Zhang will join AMD and report to Forrest Norrod, AMD's data center head. ZT Systems has over 2,500 people, and AMD has stated that it intends to keep about 1,000 of them, resulting in annualized operating expenditures of around $150 million.

Currently, ZT Systems earns over $10 billion in yearly sales, the majority of which comes from its manufacturing section.

Executives anticipate that the transaction will be completed in the first half of 2025, with the manufacturing company being sold in the following 12 to 18 months.

AMD anticipates that the transaction will improve its adjusted financial performance by the end of 2025.

CFO Jean Hu stated that the small dilution from the transaction in the first year following closure in 2025 would be compensated by increased sales of graphics processor units, resulting in a break-even impact for the deal. Hu also stated that the purchase will boost revenue growth by 2026.

"The sale of (ZT Systems') manufacturing business will have no long-term impact on AMD," said Kinngai Chan, managing director at Summit Insights. Chan noted that the transaction might help it develop its business catering to cloud users. "Having more engineers helps," he explained.

At Nvidia's developer conference in March, CEO Jensen Huang stated that the business, which used to design chips, now produces and sells whole data centers or the individual components required to build one. This year, experts predict that the company's data center sector, which includes processors and other AI technology, will produce $105.9 billion.

Su stated last month that the business expects to earn around $4.5 billion in AI chip revenue this year. The company's clients include Microsoft and Meta Platforms.