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
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.