Arm and NVIDIA – The unthinkable pt. III

This acquisition is becoming increasingly problematic.

• NVIDIA’s acquisition of Arm is becoming increasingly problematic with in-depth investigations being launched by both the UK and the EU competition authorities and the US looks certain to follow.
• This combined with the problem in China (see here) could make it so painful to complete this acquisition, that SoftBank ends up returning Arm to the public market as I think it originally envisaged when it bought the company.
• The competition authorities in both jurisdictions have stated that in-depth scrutiny of the deal is required before it is approved and may even lead to a prohibition of the combination.
• NVIDIA and SoftBank knew that this was going to be a difficult transaction which is why they set an 18-month time zone for completion, but this is increasingly looking optimistic.
• For example, NVIDIA has yet to even apply for clearance in China meaning that the 18-month deadline is already looking problematic.
• Furthermore, there is no end in sight to the dispute in China and I think that NVIDIA is unlikely to apply for clearance before the situation is resolved.
• The addition of 2 sets of slow and bureaucratic competition investigations could push the deadline for closure even further out in time.
• I have been surprised by the announcement of these investigations because as I have written numerous times, acquiring Arm is tricky because of the position of independence that it has occupied in the industry for the last 20+ years.
• Consequently, when Arm and NVIDIA were exploring this transaction, I assumed that they had been to Apple, Qualcomm, MediaTek, Samsung etc and won their approval before going ahead.
• However, the announcement of investigations strongly implies that there have been complaints or concerns raised by some of Arm’s customers with regard to its continued independence under NVIDIA’s ownership.
• NVIDIA has repeatedly and publicly stated that it “will maintain Arm’s open licensing model. We have no intention to ‘throttle’ or ‘deny’ Arm’s supply to any customer”, but this is clearly not enough for some of Arm’s customers.
• Thanks to Arm’s great success, it has thousands of customers and it only will have taken a few of them to trigger this further complication to the acquisition.
• True independence is very difficult to achieve as Nokia found with Symbian and one of the few that has successfully managed it is Samsung with its semiconductor and handset business being under the same roof.
• However, with Samsung, it is largely dealing with commodity products than can be sourced elsewhere should there be a problem which is not the case with Arm.
• Furthermore, there will be concerns that Arm’s R&D and the direction of development of its processor designs will be skewed to favour NVIDIA’s roadmap which will be very difficult to disprove.
• I have long believed that the motivation for this transaction has been more been about SoftBank’s desire to restructure, reduce debt and risk than NVIDIA’s desire to buy the company.
• Consequently, if things get too problematic, I can see SoftBank putting Arm back exactly where it left it and re-listing it on the London Stock Exchange.
• With the inflated prices currently being paid for technology companies at the moment and the scarcity of large technology companies in the UK, SoftBank might even make a little bit of money on the transaction.
• This could end up being the best solution for everyone involved.