[Swing Trade]$XLNX/AMD Merger- Get Ahead of the Game

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AMD will be acquiring XLNX at some point in the nearish future. Shareholders will receive 1.7234 shares of AMD for every share of XLNX that they own. To take advantage of this, I propose buying calls (or shares) on XLNX dated for January or May with the intent to hold through expiry to receive shares.

I’m going to look to enter following the XLNX earnings report after market close today.

From AMD’s earnings report yesterday:

“I would say we are through the vast majority of what we need to do in the regulatory front. You know, we are finishing up here.”

“There is very good progress on the integration side. So, we have done a lot on the integration. We are exited with the plans that we have.”

“We believe we are on track to close at the end of the year”

The merger is pending approval from the Chinese government. Currently, employees of AMD and XLNX are working together in teams under NDA, meaning that even if the merger gets shot down the two companies will be working together in some capacity.

This is a live comparison of XLNX and AMD share price, to see how much value you would gain on your xlnx shares if the merger were to happen today.

https://public.tableau.com/app/profile/upndown/viz/XilinxAMDSharePriceRatio_16114624177710/XilinxAMDSharePriceRatio

What will happen to my XLNX options after the merger?

In an all share merger, your strike and expiry on the company being acquired remains exactly the same. Your options will be adjusted in terms of the deliverable (100 shares of XLNX vs. 172 shares of AMD) and your options ticker will be renamed (AMD1). The adjusted options contract can be less liquid since there will be a smaller market for the adjusted contracts.

The adjusted contract AMD1 Jan X 2022 will be for 172 shares of AMD (fractional shares are paid in cash) if you decide to exercise.

So this is where it gets confusing. The LABEL of your options ticker will change to AMD1 $140 Jan X 2022 (strike price remains the same as your original XLNX contracts). The strike price remains the same ON THE LABEL, but your broker will have access to the conversion ratio (1.7234) to determine your effective “moneyness” of your original contract to determine whether you’re ITM or OTM. In other words, while the ticker still says AMD1 $140 Jan X 2022, your broker will automatically know the “moneyness” of the contract by using the $140 strike price and converting it based on the merger terms (1 XLNX: 1.7234 AMD). The $140 strike on AMD1 is effectively a call with a TRUE AMD strike price of $81.23 ($140/1.7234).

Positions: Currently None

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xlnx shares/options are also pretty expensive so will hold off taking a position now but will be on my watchlist. might sell some of my index funds to get the capital to play this though. great dd and appreciate it.

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Great info, thank you for that.
Should we have any fear of chinese government shenanigans on this? I usually avoid buying chinese shares.

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Nope! I haven’t seen any evidence of the Chinese government opposing this merger in any way.

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Holi, are you sure the strike prices would be adjusted for options? What I found so far in the S4 is the strike would only be adjusted for employee stock options. Just want to make sure this is cleared because if the strike is not adjusted, all your options would essentially be worthless after the merger goes through. (OTM Puts above amd price in that case?)

shares is still a good play. I’ll read through the S4 later more, but for now I won’t touch options

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yep! that bit about the options is from a reddit post by a guy that called the OCC to ask them about this case. That was their response.

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Could you link that post? It just sounds so good that I can only hear the phrase “if it’s too good to be true…” in my head. Basically you would double dip on the conversion rate which already is in your favour for now.

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Ok, i read the document, i could be wrong but to me it confirms that the strike will not change.

I’m assuming this was the confusing part:
Pricing
Until the cash in lieu amount is determined, the underlying price for AMD1 will be determined as follows:
AMD1 = 1.7234 (AMD)

Nothing else would suggest otherwise. But this just says that a 140 strike AMD1 contract will be worth 1.7234*AMD contract price. This is because the number of deliverables change from 100 to 172. But since the 140 strike was deep ITM for XLNX but OTM for AMD, this will net you a huge loss.

Again, it could be me who misunderstands the wording, so anyone investing should judge for themselves.

Source: https://infomemo.theocc.com/infomemos?number=48452

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I’m not sure if all mergers are the same for options or not but when I was holding APHA calls and they merged with TLRY, the strike price stayed the same ($15) but now the options are for 83/100 meaning if I exercise I would only get 83 shares of that stock instead of 100. Does this seem to be in line with what you are saying @BBarna ?

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Yes, that is my understanding of the wording, and also what i found in articles about the topic.

Still could be a put play from how i understand it. Get a 150 strike XLNX put, wich would turn into a 150 strike AMD put, for 172 shares. But I am not confident enough right now to say if this would actually be how it works

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from the XLNX earnings report:

$XLNX reports Q2 revenue $936M, consensus $890.77M.
Victor Peng, CEO: We also believe we remain on track for regulatory approval for the $AMD transaction and to close by the end of the calendar year. As permitted as of October 27, 2021 under the terms of the Merger Agreement between $XLNX and $AMD, the Xilinx Board of Directors voted unanimously to declare a cash dividend of $0.37 per outstanding share of common stock payable on November 15, 2021 to all stockholders of record at the close of business on November 8, 2021. The dividend is conditioned upon and will only be payable if the merger has not closed on or before the record date for such dividend.

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Hey Holi, thanks this is definitely an interesting one. As far as entry goes, are you concerned at all about where AMD is going in the next couple weeks? I imagine XLNX and AMD have to be pretty price correlated right? (I looked at a 1 yr chart for both and it seems pretty correlated from just eyeballing it, not the most scientific lol). This past week, AMD has been testing the 121-122 support. If it falls through, my guess is that XLNX would go down as well, and therefore entering a position right now may not be the best timing.

Is this something you’re thinking about for this play? Or maybe you’re not worried about a slight dip assuming the price does eventually climb back up to match the 1.7x merger price?

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XLNX has been trading consistently above the 1.7 merger price, which is why i am suggesting this play in the first place. It unfortunately had a huge rally this morning making an entry feel less than desirable, so I am holding off until I see it retrace to near 170 before looking to enter.

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I guess what I’m wondering though is wouldn’t we expect to see AMD and XLNX become more and more correlated esp now that they’ve both confirmed that merger is looking like a done deal?

I’m seeing that you’re betting on AMD running, and so if that happens, I would think that XLNX would run as well, and maybe even faster to start getting closer to the 1.7 price multiple? Right now it’s about 1.5

Would the prices really not follow each other? Not sure how many mergers you’ve played where it’s a stock-based transaction

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that’s why you want to buy in before they become more correlated than they already are.

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alright just got in with 1k shares. should dip now and you guys can find a good entry and avg down. just curious, is there any other risks we should be wary of? i know merger could fail because of china but anything else?

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Once the merger is completed, should we expect AMD’s price to dip? I hear companies that acquire other companies “lose money” because they’re paying for the other company’s stock or something, is that correct?

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Hey @holi, any thoughts on why xlnx price isn’t closing in on the 1.7x ratio yet? Investors still aren’t bought in on the merger happening you think?

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I think everyone is holding their breath, waiting for it to go through. It could happen any time though