SoftBank and Arm – Arm’s off.

Arm looks to be off the table.

• The reorganisation of Arm that was announced last month (see here) has been cancelled in what I think is a sure sign that SoftBank has given up trying to sell it.
• This is good news for all concerned because Arm will maintain its crucial neutrality in the wireless semiconductor industry and SoftBank now has more time to make its IoT dream come to fruition.
• The only real loser here is RISCV which would have seen a huge boost in interest if Arm has been sold to someone like NVIDIA.
• The news came on Monday 24^th August when Arm stated “After further diligence, we have determined that both IoTP and Data can realize the same benefits as independent operating businesses, each with their own P&L, under the Arm Limited umbrella with less operational disruption”
• In English, I think this means “the rally in SoftBank’s share price has reduced the pressure on us to sell and so we are putting the company back the way it was in order to continue our long-term strategy”
• When SoftBank bought Arm in 2016 it spent $31.6bn to acquire a fantastically profitable company but one that was unable to make bold long-term bets.
• This is because Arm’s valuation was dependent on its margins and the minute a large investment program would have been announced, the shares would have collapsed.
• SoftBank took the company private and immediately began re-investing its profits in IoT which I think has always been a long-term ambition of Mr Son.
• The result is that Arm is currently running at breakeven but has not yet been able to reap the benefit of these investments.
• While this may have been a surprise to SoftBank, my expectations from day 1 (see here) have been that it would take 5-10 years to fashion Arm into a global IoT powerhouse that could be relisted at a big profit.
• Unfortunately for SoftBank, a series of bad decisions came home to roost in the second half of 2019 (see here and here and here) which combined with the pandemic put real pressure on SoftBank’s share price resulting in increased pressure from activists.
• It was the need to pay down debt and finance a huge share buyback that led SoftBank to consider selling or relisting Arm.
• However, now that the share price has rallied 153% off its March low, SoftBank and Mr Son can breathe a collective sigh of relief.
• He still has to deliver on his promises, but the market recovery has made it much easier for him to raise capital and sell assets.
• Hence, the Arm asset can go back into the portfolio with more time to get it into a condition where it can be sold or relisted for a good return.
• The big loser is here is RISCV, which is an open-source alternative to the Arm processor.
• If Arm had lost its independence by being sold to NVIDIA, then arch-rivals like Qualcomm and Broadcom would have had a big incentive to look at RISCV as an alternative to using Arm as the last thing one wants is to be in thrall to a competitor.
• This means that RISCV’s big hope has to be China’s desire to become fully independent technologically, but this is going to be a tall order given the size and vibrance of the Arm ecosystem.
• SoftBank’s decision to put Arm back in the cupboard for the foreseeable future is the right choice and I suspect the only way that it will ever make a return on the $31.6bn invested.