A takeover deal built for the times
Heavily indebted SoftBank’s overpriced $32.2b play for chip designer ARM allows it to have a stake in several growing tech areas: Cloud, augmented and virtual reality for mobile devices and the Internet of Things
he UK tech sector just got an oversized star — ARM Holdings — a chip designer that relatively few people had heard of until its sale to the Japanese tech giant SoftBank. Masayoshi Son, SoftBank’s chairman, is plunging his company deeper into debt to pay an outrageous sum for ARM, which doesn’t manufacture anything, sell a service or even write software. It’s probably a brilliant bet. SoftBank is paying £24.3 billion (Dh116.9 billion) for ARM, whose revenue reached £968.3 million last year. According to data compiled by Bloomberg, it’s by far the biggest company in the UK with a priceto-sales ratio of more than 15 — the other 69 companies matching that description range from medium-sized to tiny, many of them science-based start-ups without any revenue.
After the deal announcement, ARM accounts for one-third of the total capitalisation of all UK-traded tech companies: That’s because modest ARM is the most serious competitor to the chip Goliath Intel, a company with 39 times the revenue. It plays the role of David increasingly convincingly.
Set up in Cambridge in 1990 to design the processor for Apple’s ill-fated Newton tablet, ARM has been designing chips ever since. In 2014, ARM CEO Simon Segars told Bloomberg that while Intel made an effort to build a brand, telling end consumers its product was inside their computers, his company took a different path. “We haven’t really bothered with that,” he said. “We’ve bothered on making it small, making it low-power, and building a big ecosystem that thrives on choice.”
That meant staying out of manufacturing and instead licensing the chip designs to other companies, which would customise them and either make the processors or order them from Chinese community electronics makers.
Marketing effort
The small size, energy efficiency and versatility of ARM designs meant they were perfectly suited for the budding mobile era. Device manufacturers including Nokia and Apple, Samsung and Huawei, today’s smartphone market leaders, got used to using ARM-based processors.
Without making much of a marketing effort, ARM became a brand for manufacturers rather than end consumers, and that was more important because the device maker’s decide what goes inside a gadget. Practically every smartphone today uses ARM-designed processors based on socalled reduced instruction set computing (RISC), as opposed to Intel’s complex instruction set computing (CISC).
By 2013, Intel caught up to ARM in terms of energy efficiency. It became irrelevant whether a processor was RISC- or CISCbased. Either approach could be used for any purpose — only system design was important. But ARM had already won manufacturers’ loyalty. It could even venture into Intel’s territory, offering its processors to the makers of powerful servers. This year, ARM processors’ unit share in servers is just 0.3 per cent, but IDC predicts it will rise to 9.7 per cent by 2020. That’s because ARM chips are reputed to consume less energy — and because they are commoditised, unlike Intel processors; the cost savings are important for big data centres used in cloud computing.
Google, among others, is looking into shifting its data centres from Intel’s x86 chips to ARM ones. Meanwhile, the mobile world is on the threshold of a big shift: Phones are beginning to incorporate virtual reality and augmented reality technology.
Then there’s the Internet of Things — a world of connected light bulbs, thermostats or cars. All of these objects, soon-to-be devices, require cheap, small, energy-efficient processors.
SoftBank, of course, is heavily indebted. It has been selling off valuable assets, such as shares in the Finnish game developer Supercell and the e-commerce giant Alibaba, to reduce the burden. Yet as far as Son’s “crazy ideas” go, ARM looks like a better bet than SoftBank’s mobile operator acquisitions in the US and Japan.
Unlike those, in a sector with waning profit opportunities, ARM allows SoftBank to have a stake in several growing tech areas: Cloud; augmented and virtual reality for mobile devices; the Internet of Things.
The companies that reap most of the financial benefits of ARM’s work are manufacturers such as Qualcomm and AMD. They also carry practically all the risk, though.
It’s reasonable to expect that the company’s revenue will continue growing exponentially, as it has during the smartphone revolution, quadrupling over the last ten years.
Son’s strength is that he’s not afraid to overpay when he has a vision for a company. That’s how he won with Supercell and Alibaba; ARM is not really an early-stage investment like those two — but much bigger things are coming for the 25-year-old company.