Japan’s SoftBank reportedly is considering a sale or an initial public offering (IPO) of its Arm semiconductor design firm. SoftBank acquired Cambridge, England-based Arm in 2016 for $32 billion. Unnamed sources have said that graphics chipmaker Nvidia Corp. (NASDAQ: NVDA) has expressed interest in acquiring Arm, but none of the firms involved have commented on the reports.
Nvidia just completed its biggest deal ever, an all-cash $6.9 billion acquisition of Israel-based Mellanox. Nvidia reported cash and equivalents totaling $16.4 billion at the end of April — after the deal for Mellanox was completed. Throw in a bushel or two of Nvidia shares and the deal could get done.
One research firm reckons that an Arm IPO might fetch up to $44 billion for SoftBank and that by 2025, Arm might be valued at $68 billion, a gain of 50%. If that IPO estimate is accurate, Nvidia likely will have to offer something closer to $50 billion to pry Arm away from SoftBank.
For the sake of argument, let’s assume that Nvidia makes a generous offer and SoftBank accepts. How will regulators and customers react to the deal? Probably not very well.
Arm does not manufacture semiconductors. It designs them and then licenses the designs to anyone willing to pay the fees. The willing licensees include Apple Inc. (NASDAQ: AAPL), Qualcomm Inc. (NASDAQ: QCOM), Alphabet Inc. (NASDAQ: GOOGL), Microsoft Corp. (NASDAQ: MSFT), and Samsung.
According to a report from Bloomberg, SoftBank approached Apple to determine if the world’s most valuable company would be interested in acquiring Arm. Apple was not interested, according to Bloomberg’s sources, who cited regulatory concerns and Apple’s hardware-based business model.
But Apple is sitting on a $94 billion cash hoard (including short-term investments) and an all-cash bid could tilt the bidding in Apple’s favor if Nvidia or Qualcomm ($9.9 billion in cash and investments) made offers that included stock. Samsung’s cash pile totals more than $92 billion including $23 billion in cash and equivalents, so an all-cash offer from the Korean giant is not out of the question either.
At the end of its second fiscal quarter, Microsoft reported $13.6 billion in cash and nearly $123 billion in short-term investments, while Google reported nearly $20 billion in cash and equivalents at the end of the first quarter, along with nearly $98 billion short-term investments.
So, there’s plenty of cash floating around, but that may be the smaller problem with an acquisition.
Regulatory approval for an acquisition by any tech firm that uses Arm’s designs and would then have pricing power over competitors that also use Arm chips is sure to elicit screams from those competitors. Those protests come on top of regulators’ usual concerns about anticompetitive and antitrust issues.
Chinese regulators took more than a year to grant approval to Nvidia’s acquisition of Mellanox. A similar delay, or an even longer one, may be in store for Nvidia if it acquires Arm.
One of the country’s promising artificial intelligence (AI) chip startups, Cambricon Technologies, is lining up for its own IPO on Shanghai’s Star market. Nvidia’s graphics processors are a staple of AI technology and China is unlikely to be easily satisfied by any promises from Nvidia to continue to sell Arm designs to all comers. China might well prefer that Arm disappear altogether.