Surprising almost no one, the US Federal Trade Commission has moved to block Nvidia’s acquisition of Arm. We have written a lot about this deal and Arm in general, and wanted to touch on the topic in light of this news.
We will save the background on this deal for that prior piece, but a few things stand out. Arm is seen by regulators as being too important to not be neutral. No other chip company can buy the company, as no one wants to compete with this key supplier of semiconductor intellectual property (IP), and almost every major chip company is now an Arm licensee, one way or another. So what will happen to the company now?
We have to first look at Arm’s current owners, Softbank – the Japanese investment firm. Their original impetus for selling Arm dates back a few years when they were under pressure from some expensive, high-profile deal failures, WeWork being the best known example among several others. At the time, Softbank needed to raise cash or at least convince their own investors that they had the ability to do so. Fast forward to today, and Softbank is in a much better position. They seem to have benefited strongly from the technology stock market bull run over the last two years. They made some big bets on the market and these have paid off, so the company is now in a much better financial position.
So one option is for Sotbank to do nothing. Arguably, Arm needs to make some big investments to fund future R&D needs, but from the outside it certainly seems like Arm could raise sufficient funds on its own to do this.
Nonetheless, we have to think that Softbank would still like to exit. They almost made a pile of cash and having it snatched away is the kind of factor that spurs the brain to think of alternatives. The most likely outcome is an IPO of at least a minority stake of Arm. Prior to the Nvidia deal, Softbank seems to have gone far down this path. However, Softbank faced the problem that the public markets would have likely valued Arm less than what Softbank hoped (or possibly even what they paid for it) and far less than what Nvidia offered. The capital markets are in a different place today, and Arm is likely to attract a much higher valuation because semis are hot now in a way they have not been for a long time. One wrinkle for this plan is that an IPO will take some time to arrange. We would guess at least six months, possibly longer. No idea what the markets will look like then, and it leaves Arm in limbo when they should be doing all that R&D investment.
A second alternative is for a consortium of chip companies to band together and buy it collectively. There is precedence for this kind of corporate action. The best example is Dutch semicap equipment maker ASML which raised money a decade ago from all the leading foundries to fund the development of EUV systems. This was a very similar situation to Arm in that ASML managed to structure an investment from several companies who were erstwhile competitors including TSMC and Intel. A transaction for Arm would likely need to include a controlling stake so that Softbank can de-consolidate and book its profits. If true, we imagine there are a number of private equity firms who would be more than happy to fill the role. We envision this deal being comprised of a half dozen large Arm licensees – Qualcomm, Apple, Broadcom, among others. This approach would assuage “most” regulators’ concerns. For US Football fans, this is the equivalent of the people of Green Bay buying the Packers. All of them own it, none of them directly control it. In theory, Intel and Nvidia could even participate in the consortium, albeit this is likely a bridge too far for both of them (for different reasons).
We say “most” regulators would approve, because as is now obligatory in anything we write about semis there is China. From a straightforward anti-trust viewpoint, this sort of structure should be suitable, but there is a strong geopolitical component at play. In today’s context, part of the appeal of a consortium buying Arm is that it would keep Arm in US/European hands. We are not convinced as to the practicality of this, but we can envision many of the participants waving the flag. China’s regulators would very likely take this viewpoint. It is worth noting that they have never voiced an opinion on Nvidia’s deal. So they may attempt to block a buyout, but this time they might be forced to actually say so. (And let’s not even discuss Arm China.)
The UK might have some concerns about a buyout, but a promise to not relocate the company or cut any jobs would probably go a long way to assuaging those concerns. A buyout also probably offers a better return for Softbank, as the buyers would be willing to pay a premium. And these two approaches are not incompatible, with a consortium buy-out today and an IPO somewhere down the path.
In our opinion, the best option for the industry is for nothing to happen and for Softbank to continue ownership, keeping Arm neutral. That being said, we think an IPO or some form of buyout is more likely, and probably the best guarantor of Arm’s neutrality.