Nvidia & Arm – The unthinkable pt. X

A deeper investigation was always expected.

• It looks like the UK Government is going to order a phase II investigation into Nvidia’s purchase of Arm from Softbank which is going to delay things further and may force Nvidia to make bigger concessions to get the deal through.
• The UK Sunday Times (see here) has found sources that claim that Nadine Dorres, the digital and culture secretary will order the investigation sometime this week.
• This comes after the UK Competition and Markets Authority (CMA) was surprisingly scathing in its assessment of the deal stating that the transaction could “stifle innovation across a number of markets” including datacentres, IoT, and Automotive.
• It also rejected Nvidia’s proposed remedies with the statement that it “had found the offer to present considerable specification, circumvention, and monitoring and enforcement risks”.
• The CMA also went on to state “the CMA does not believe any form of behavioural remedy would address the competition concerns identified to the phase 1 clear-cut standard”.
• The fact that the CMA found issues was not a surprise, it was the degree to which it was not satisfied by Nvidia proposals that surprised me and, I suspect, Nvidia as well.
• Following on from this there will almost certainly be a phase II investigation by the CMA which will significantly extend the time for the deal to pass regulatory scrutiny.
• This is well within the bounds of current expectations as both Nvidia and Softbank warned when the deal was announced that the 18-month deadline might not be met.
• Hence, while a deeper investigation is not a surprise, it has become clear that Nvidia will need to offer more guarantees to the UK regulator in order to get the deal approved.
• I still think that the deal can be approved as there is plenty of evidence in the technology industry where these competition issues have been successfully mitigated.
• Samsung has successfully managed an almost identical problem within its business units for years with no real issue.
• Samsung’s handset competitors have been purchasing memory, storage, and displays from Samsung for decades and would have stopped doing so in a heartbeat had there been even a whiff of unfair treatment.
• On the positive side, a number of semiconductor companies who are dependent on the Arm processor (Broadcom, MediaTek, and Marvel) have publicly supported the deal leaving Qualcomm, Intel, and Microsoft as its biggest opponents.
• Regardless of the outcome, the competition concern is not going to go away until 5 or so years after the acquisition has closed and the deal has been a smashing success and the benefits have been proven to the critics.
• This is why the simplest solution to SoftBank’s ownership of Arm is to put it back where it found it on the London Stock Exchange with a secondary listing in New York.
• The deal can close but it remains to be seen how the remedies that NVIDIA puts through to keep the regulators quiet impact the benefits and synergies of having the two companies under one roof.
• The regulators remain by far the biggest hurdle to getting the deal done as the CMA continues to demonstrate.