It’s been a year since Nvidia announced that it would buy ARM from SoftBank for $40 billion. At the time, Nvidia and SoftBank expected the acquisition to close by March 2022. The companies have not come much closer to making this a reality.
If anything, the deal is facing now a daunting challenge to overcome the UK’s Competition and Market Authority (CMA) report that states that there are no structural or behavioral remedies that would allow this deal to close. This comes from a regulator that most of us considered the most receptive to the arguments for the deal.
Meanwhile, there are reports that Nvidia has offered concessions to the EU, which will follow-up with the various companies if the concessions are sufficient to alleviate their concerns. SoftBank must be looking for a Plan B beyond waiting until September 2022 when the deal expires.
The pressure is on for SoftBank as the underlying stock market value has increased by around 50% since the deal was announced. ARM’s value has not participated in this value appreciation. SoftBank bought ARM, the premier chip company in the world, in 2016 for $31 billion selling it for roughly 30% more four years late. From 2016 to today, the NASDAQ increased by roughly 300%. The stock is now trading below the close of when Softbank announced the deal to sell ARM. Subsequently, SoftBank’s market cap has declined from $171 billion in February 2021 back to $102 billion at the end of September 2021.
This means the value of ARM as a proportion of SoftBank decreased from 40% to 23% then increased back to 40%. It is clear that the ultimate sales price of ARM was a major driver in Softbank’s value. SoftBank also restructured its T-Mobile USA holdings by swapping them into Deutsche Telekom holdings. Many observers were puzzled by the move as the price for the T-Mobile USA shares was substantially below the trading price at the time and its new Deutsche Telekom shares came with a holding period until 2024.
A few weeks later, Bloomberg reports that JP Morgan sold 90 million Deutsche Telekom shares that were traced back to Softbank driving Deutsche Telekom shares down by 4.5% below its long term support levels. While Deutsche Telekom said that SoftBank still owned the shares, SoftBank had won only weeks earlier the permission to use the Telekom shares as security for loans, hedging transactions, or to sell them on a forward basis. Either way, it looks like SoftBank is looking to raise money by monetizing its assets.
ARM’s massive success is also its challenge. Developing the IP underlying most of the CPUs that are operating in the world and licensing its cores and/or IP to other companies to build the actual CPU has made ARM a very profitable company. ARM is at the heart of a massive semiconductor industry. Apple could not have launched its own silicon without licensing ARM’s instruction set and architecture; Qualcomm’s Snapdragon wouldn’t be as snappy; AWS’s Graviton chip would be heavier; and Google’s Tensor wouldn’t be as strong… you get the message. Nvidia, which is working on its own ARM-based CPU, likes ARM so much it wants to own it. ARM powers it all.
If that wasn’t enough, both AMD and Intel said they were ready to build ARM chips if needed. There is clearly demand for ARM technology. Judging from the CMA report there is also quite a lot of concern of ARM being owned by someone who will not be a neutral provider of IP to everyone. This reduces the number of likely owners that have both the financial wherewithal to buy ARM and to ensure its neutrality as an IP vendor to all, to a very small number if not to zero. So how can SoftBank get its return on its investment while maintaining ARM’s independence? It is a problem with an answer staring you in the face.
Qualcomm’s new CEO Cristiano Amon’s comments gave rise to an interesting idea: If Softbank would IPO ARM then a number of technology companies would likely invest in ARM. Such a Switzerland-like-approach would make the core technology available to all in the ecosphere. The larger the investment of ARM’s customers in ARM, the better funded it would be, and the faster it could deliver innovations; ARM could focus on just developing new technologies that feed processor efforts of its customers.
At this time, while the merger is still being reviewed, those who want to block the acquisition are motivated to prevent it from happening and may offer better terms than if SoftBank comes to the negotiating table after the acquisition is denied. We don’t know what SoftBank’s Plan B is, but it is unlikely that someone will offer SoftBank more after a failed merger than while the deal is still being reviewed and ARM is in demand. Nothing drives price like a competition.
Roger Entner is the founder and analyst at Recon Analytics. He received an honorary doctor of science degree from Heriot-Watt University. Recon Analytics specializes in fact-based research and the analysis of disparate data sources to provide unprecedented insights into the world of telecommunications. Follow Roger on Twitter @rogerentner.