Arm out on a limb as owner SoftBank looks to raise cash

Un­cer­tain fu­ture for chip de­signer re­garded as the crown jewel of Britain’s tech­nol­ogy in­dus­try, writes Hasan Chowd­hury

The Daily Telegraph - Business - - Technology Intelligen­ce -

When SoftBank swooped in with a $32bn (£24bn) takeover of Arm in 2016, the Ja­panese con­glom­er­ate promised to keep the “crown jewel” of Britain’s tech­nol­ogy in­dus­try in the UK while pledg­ing to dou­ble its head­count of 1,700.

In the af­ter­math of the Brexit vote, the Cam­bridge-based mi­crochip de­signer had be­come cen­tral to the vi­sion of Masayoshi Son, SoftBank’s enig­matic founder, who dreamed of an in­ter­con­nected fu­ture with chips fit­ted in bil­lions of de­vices.

But just four years later, Arm’s fu­ture looks set to be dis­con­nected from its Ja­panese owner. The for­mer FTSE 100 star had been gear­ing up for a relist­ing in 2023, un­der the guid­ance of SoftBank. In­stead, it is be­ing cir­cled by suit­ors look­ing to buy it.

For SoftBank, a de­ci­sion to put Arm on the ta­ble will be a dif­fi­cult one to make, with the com­pany’s de­signs set for a wave of demand from 5G ven­dors. But af­ter fac­ing its big­gest loss ever in May, SoftBank is mov­ing to mon­e­tise its roughly $270bn (£212bn) of hold­ings and free up funds.

What are its op­tions on Arm?

A sale of Arm

One op­tion is a full or par­tial sale. On Wed­nes­day, it emerged that US chip gi­ant Nvidia had ap­proached Arm with takeover talks in re­cent weeks in what would be the big­gest deal ever in the sil­i­con chip in­dus­try. There would be some sense in sell­ing to Nvidia. The $250bn firm, once part-owned by SoftBank’s $100bn Vi­sion Fund, al­ready re­quires Arm soft­ware, lauded for its power ef­fi­ciency, for its graph­ics chips.

Ap­ple is another in­dus­try gi­ant that li­censes Arm de­signs. The smart­phone maker uses them in its iPhones and iPads, and will soon use them in its Mac lap­tops. It was ap­proached by SoftBank re­cently to gauge in­ter­est in a bid, ac­cord­ing to Bloomberg.

For po­ten­tial buy­ers cir­cling the mi­crochip de­signer, there could be fi­nan­cial re­wards. Rolf Bulk, eq­uity re­search an­a­lyst at New Street Re­search, claims Arm’s in­come from li­cence fees should of­fer sus­tain­able growth in rev­enue “for years to come”.

“As long as Arm is well-man­aged, in­cre­men­tal roy­alty rev­enues are essen­tially pure profit, mean­ing Arm will dis­play un­par­al­leled fi­nan­cial per­for­mance,” he says.

But any move to sell Arm could run into com­pli­ca­tions. For one, SoftBank’s ac­qui­si­tion of it in 2016 in­volved a legally-bind­ing pledge to in­crease Arm’s staff num­bers un­der rules set out by the gov­ern­ment’s then-newly es­tab­lished Takeover Panel.

To date, SoftBank has al­ready bol­stered the Cam­bridge firm’s em­ployee count, with 2,742 re­ported in the UK last Septem­ber – 74pc of which in­volved tech­ni­cal staff.

But un­der the pledge, Arm must have 3,494 staff in Britain by 2021 and 70pc of those must be tech­ni­cal em­ploy­ees. Can­di­dates like Ap­ple and Nvidia are likely to be put off by reg­u­la­tory dif­fi­cul­ties that could come, as so many of their ri­vals like Sam­sung and Qual­comm de­pend on Arm.

Any at­tempt to buy Arm could also spur ri­vals to in­ter­vene, or even try and build their own de­signs for sil­i­con chips. Richard Wind­sor, an an­a­lyst at Ra­dio Free Mo­bile, says: “The minute some­one ac­quires Arm, ar­guably the in­cen­tive to use Arm di­min­ishes im­me­di­ately.”

Trea­sure data sale

SoftBank is also said to be mulling over a plan to off­load parts of Arm that are ded­i­cated to in­ter­net of things (IOT) ser­vices. But this busi­ness line has been ex­pen­sive to build up and an­a­lysts say the mar­ket has been slower to take off than an­tic­i­pated by Son, who had pre­dicted a world where bil­lions of de­vices would talk to each other con­stantly.

This cloud and data di­vi­sion re­quired ex­tra in­vest­ment from Arm. SoftBank now ap­pears to be tak­ing this off Arm’s bal­ance sheet, merg­ing Arm’s IOT ser­vices di­vi­sion, in­clud­ing its Trea­sure Data wing it ac­quired for $400m, into a sep­a­rate new com­pany.

It is re­port­edly seek­ing a $1bn val­u­a­tion for this sep­a­rate ven­ture.

‘As long as Arm is well­man­aged, in­cre­men­tal roy­alty rev­enues are essen­tially pure profit’

Early ini­tial pub­lic of­fer­ing

Ear­lier this month, The Daily Tele­graph re­ported that SoftBank could look to relist Arm ahead of sched­ule in 2021. The tar­get venue, sources claimed, would be the Nas­daq ex­change in New York, where tech firms re­ceive hand­some val­u­a­tions ver­sus London’s main board.

An­a­lysts pointed to the re­cent of­fload­ing of the “in­ter­net of things” busi­ness as a sign that a float was “more likely”, giv­ing Arm the chance to fo­cus on gen­er­at­ing profit from its core de­sign work. “Arm would be in a stronger po­si­tion to in­no­vate in our core IP roadmap and pro­vide our part­ners with greater sup­port,” Si­mon

Se­gars, the Arm chief, said at the time. An early list­ing, ac­cord­ing to es­ti­mates from New Street Re­search, could help Arm hit a $44bn val­u­a­tion, which could grow to $68bn by 2025.

It would also help meet de­mands from one of SoftBank’s trick­i­est share­hold­ers. El­liott Man­age­ment, a Wall Street hedge fund that amassed a $3bn stake in SoftBank ear­lier this year, has called on the firm to buy back $20bn of its shares and shore up the price of its stock. To fa­cil­i­tate this, SoftBank could look to mon­e­tise Arm.

Other an­a­lysts, how­ever, sug­gest an even higher val­u­a­tion would be re­quired to jus­tify a float.

Wind­sor sug­gests it would need to score at least a $50bn val­u­a­tion to make the price SoftBank paid in 2016 worth­while. “The only re­al­is­tic op­tion for SoftBank re­mains a re­turn to the pub­lic mar­ket,” he says.

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