Softbank & ARM – We’ll be back!

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I think ARM could return to the market in 5 to 10 years. 

• SoftBank and ARM have announced that SoftBank will acquire ARM for GBP17.0 per share in cash representing a 43% premium and a total price of $31.6bn.
• From ARM’s perspective the rationale for the deal is clear as:
  • First: ARM shareholders are getting a pretty good deal.
  • With the rapid slowdown in ARM’s core market and the difficulties being experienced by many of its customers, investors are unlikely to see GBP17.0 on the share price in the foreseeable future.
  • From that perspective ARM’s board have a fiduciary duty to accept an acquisition if it is deemed to be in the interests of shareholders.
  • Second: SoftBank has committed to substantially ramp up investments, particularly in IoT, which is something that as an independent company ARM would never have been able to do.
  • Third: SoftBank has committed to maintain ARM’s independence, pretty much exactly the way it is, which will have been critical to ensuring that customers, partners and users of ARM’s technology are comfortable with the acquisition.
• However, from SoftBank’s perspective the acquisition is less obvious:
  • First: ARM is a long way outside of the sorts of areas where SoftBank has historically invested and there does not seem to any fit with anything else that it does.
  • Second: One potential reason for the acquisition would be to use ARM as the foundation upon which to build the next Intel but I am certain that this is a non-starter.
  • This is because there is no way that ARM’s existing customers and partners would stand idly by while SoftBank builds a competitor while owning technology upon which they have become dependent.
  • Third: The 30% appreciation of the Japanese Yen and the flat-line of ARM’s share price over the last 12 months means that the transaction is 30% cheaper for SoftBank than it was 12 months ago.
  • Consequently, this investment could be a vehicle for investing in the recovery of the pound but it looks like that SoftBank’s interest predates the recent 10% collapse in the GBP value.
• It would appear that SoftBank aims to earn its return on the money invested through an expected appreciation of the GBP once Brexit has been executed and from returns on the investments that will now be possible by ARM.
• I expect that these will be aimed at pushing ARM’s processor into more industry verticals such as servers, IoT, automotive and so on but also at increasing the degree to which ARM’s technology is used in device chips.
• This will have the effect of both increasing volume (more devices sold using ARM) and increasing price (more ARM technology used in each device).
• In the long-term, I can’t see any reason why SoftBank would want to hold onto this as there is no strategic fit, synergies or integration benefit to be had from owning ARM.
• Therefore, I suspect that if SoftBank is successful at increasing’s ARM’s position through accelerated investments, we will see ARM return to the market in the form of another IPO just at a much higher level in 5 to 10 years’ time.