Just a few weeks ago we at CCS Insight published an update on the status of Nvidia's proposed $40 billion acquisition of Arm from SoftBank (see SoftBank Needs a Backup Plan for Nvidia Deal). We outlined the status of the proceedings and potential next steps. One likely part of the outcome was that the UK Competition and Markets Authority (CMA) would complete its review at the end of July and raise significant competition concerns about the deal, beginning a phase two review. The piece also set out the status with other regulatory bodies and how the situation is likely to unfold in the coming months.
Our conclusion was that contrary to popular opinion at the time, the odds are stacked against the deal completing, at least without significant concessions. We noted that SoftBank badly needed a plan B as Nvidia can afford to play the long game, particularly as its status as an Arm licensee means it can forge ahead with development of products like Grace, an Arm-based server CPU, regardless of the status of the transaction. In the meantime, all those that use Arm designs suffer in the face of significant uncertainty.
On 20 August 2021 the Competition and Markets Authority published its report, saying that it had significant concerns about Nvidia's purchase of Arm and recommended a phase two investigation. Specifically, the decision stated that "The CMA is concerned that the merged business would have the ability and incentive to harm the competitiveness of Nvidia's rivals by restricting access to Arm's intellectual property." It went on to say that "the loss of competition could stifle innovation across a number of markets, including data centres, gaming, the Internet of Things and self-driving cars. This could result in more expensive or lower quality products for businesses and consumers".
The decision is not a surprise, but it is worth unpacking the extent of the concerns cited and considering the implications.
An important part of the determination was that it dismissed the proposed undertakings designed to address concerns about competition and independence. They included an open licensing regime based on equal access and interoperability, including protections against disclosure of sensitive competitive information. CCS Insight is unsurprised that this was dismissed, as the undertaking includes no way to ensure it works over the long term with "effective monitoring and enforcement".
Similarly, the selling of certain parts of Arm's intellectual property was dismissed on the basis that the impact would not be straightforward enough to work out in a phase one review. We believe this could prove a difficult obstacle to overcome, as the amount of intellectual property Arm has is what makes the company valuable to Nvidia. Setting out which bits Nvidia is prepared to sacrifice is likely to be very difficult. With Nvidia prepared to pay such a premium for Arm, identifying concessions sufficient to appease regulators is also likely to be challenging.
The report also paints a picture of the amount of evidence submitted from across the industry in opposition to the deal. Even though Nvidia emphasized support from Broadcom, Marvell Technology and MediaTek, this is a drop in the ocean compared to the broader Arm ecosystem, where many submitted evidence in opposition. What makes the CMA phase one conclusion particularly significant is that this information and the conclusions gathered as part of the investigation will be shared with other bodies.
So where do proceedings go from here? The fact that the UK and other governments are also evaluating the deal on national security grounds adds a further element of complexity that we have looked at before (see Arm and Nvidia. Heads or Tails). That aside, we believe that the European Commission is very likely to launch an investigation once Nvidia formally files the deal. The formal filing will trigger a 25-day preliminary review with a 90-day investigation being the next step. With regulatory bodies all sharing information, it is likely that the Federal Trade Commission will await the EU's determination before announcing its own conclusion.
The sequence of events is playing out as we outlined a few weeks ago. Little has actually changed, but media sentiment about the deal's outcome has soured considerably. It has long been our view that approval was unlikely without considerable concessions. As we've said above, identifying concessions that allow Nvidia to maximize its $40 billion investment and simultaneously appease regulators is likely to be extremely difficult.
Pressure is increasing on SoftBank to activate a plan B, but the premium on Nvidia's original offer makes this extremely difficult. An eventual return to public ownership looks increasingly likely for Arm, but its ecosystem will have to endure many more months of uncertainty before a conclusion is reached.
Geoff Blaber is CEO of CCS Insight, an analyst firm based in London.