Xilinx Stock Primed to Gain from Semiconductor M&A (XLNX)

Snapping up a few shares of Xilinx stock looks like a pretty good idea right now.

That's because Xilinx Inc. (Nasdaq: XLNX) has moved to the top of the list of possible acquisition targets in the semiconductor industry.

And make no mistake, the chipmakers are in the mood for deal-making.

Just yesterday (Thursday) we saw the $37 billion acquisition of Broadcom Corp. (Nasdaq: BRCM) by Avago Technologies Ltd. (Nasdaq: AVGO). Back in March, NXP Semiconductors NV (Nasdaq: NXPI) agreed to pay $11.8 billion for Freescale Semiconductor Ltd. (NYSE: FSL).

And Intel Corp. (Nasdaq: INTC) has been circling Altera Corp. (Nasdaq: ALTR) for two months now.

Deals in the semiconductor industry have already surpassed the $19.5 billion total for all of last year - and that was a three-year high.

"There's absolutely more to come," Gavin Slader, a managing director in the investment-banking group at JMP Securities, told Bloomberg. "I would almost say anyone who hasn't done a deal at this point has either got to be thinking about selling themselves or being acquisitive."

Every fresh M&A deal reminds investors of the potential for profits. Broadcom stock, for example, shot up 21% Wednesday on rumors of the Avago deal.

Now Xilinx is lined up to be one of the standout takeover potentials...

More Deals a Good Omen for XLNX Stock

And even after all the merger activity that's happened, there are still a fair number of targets, including Atmel Corp. (Nasdaq: ATML), Silicon Laboratories (Nasdaq: SLAB), Microchip Technology Inc. (Nasdaq: MCHP), and Maxim Integrated Products Inc. (Nasdaq: MXIM).

But while any of those could be bought, Xilinx has the traits of a front-runner. It's affordable, but big enough to make an impact on the acquiring company. Plus, XLNX has an unusual technology that could give its new owner an edge.

That makes Xilinx stock, which is trading at about $48 right now, a compelling buy. An offer for XLNX should include a premium of between 10% and 25% - a very nice short-term gain.

The Avago offer of $54.50 for Broadcom, for instance, is 15% above the BRCM trading price of about $47 before the rumors erupted.

And Xilinx stock has a good chance of faring better, because of these characteristics that open the door to more suitors...

Xilinx Stock Will Benefit from a Bidding War

A valuation of $12.35 billion makes Xilinx digestible for most of the major chipmakers, as three of the four top contenders have market caps of more than $100 billion.

But it's the company's specialized tech that will draw the attention of potential buyers. Xilinx is one of only two semiconductors to dominate a specialized area called Field Programmable Gate Arrays, or FPGAs.

[epom key="ddec3ef33420ef7c9964a4695c349764" redirect="" sourceid="" imported="false"]An FPGA chip can be reprogrammed, making it more flexible than most other chips. It's a feature that's particularly useful in specialized servers, such as those used in data centers. An FPGA chip can be "tuned" to optimize for speed and efficiency.

FPGA technology is also seen as a way to squeeze more performance out of chips as engineers reach the physical limits of how much faster they can make them run.

In addition to added capabilities, the FPGA market is expected to grow from $4.6 billion last year to $8.5 billion in 2020.

Xilinx essentially splits the FPGA market with one other company - Altera. Intel uses a lot of FPGA technology and works with both companies. So if Intel can't reach an agreement with Altera, it could try to snag Xilinx instead. That's one scenario.

But several other top semiconductor companies also have good reasons for making a play for Xilinx. Such as:

• International Business Machines Corp. (NYSE: IBM): IBM is still in the server chip game and has made its OpenPower chips compatible with FPGA technology. IBM might buy XLNX to solidify its position in this market, especially if Intel buys Altera.

• Qualcomm Inc. (Nasdaq: QCOM): Qualcomm is looking to expand into the server chip business. An acquisition of Xilinx would give Qualcomm a nice head start.

• Advanced Micro Devices (Nasdaq: AMD): AMD is also a major player in the market for server chips and would love the security of owning an FPGA company. If archrival Intel does close the deal for Altera, it will make life uncomfortable for AMD. Xilinx would be an ideal acquisition, but a huge stretch for AMD, which would have to take on massive debt to pull off a deal.

The desire to own FPGA tech should move at least one of these suitors to attempt to acquire Xilinx before the end of this year.

But even without a deal, Xilinx stock has strong prospects. Analysts at Pacific Capital believe investors have underestimated the potential of Xilinx's FPGA technology. They have an Overweight rating on the stock with a $60 price target - a 25% gain from today's close of $47.82.

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