Arm & NVIDIA – The unthinkable pt. VIII

NVIDIA has some explaining to do.

• The UK competition authority clearly has more concerns than expected with regard to NVIDIA’s purchase of Arm, meaning that NVIDIA is going to have to make more concrete commitments in order to get the deal through.
• The UK Competition and Markets Authority (CMA) issued its report (see here) on the transaction, concluding that the transaction could “stifle innovation across a number of markets” including datacentres, IoT, and Automotive.
• It came as no surprise that the CMA said that it had “received a substantial number of detailed and reasoned submissions from customers and competitors raising concerns in numerous markets” as there is no shortage of criticism of this transaction.
• However, what was a surprise was the degree to which the CMA has rejected NVIDIA’s proposed remedies as it stated that it “had found the offer to present considerable specification, circumvention, and monitoring and enforcement risks”.
• The CMA 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”.
• In plain English, this means that the CMA does not think that NVIDIA is doing nearly enough to ensure Arm’s independence and that further investigations are warranted.
• The culture secretary (whose portfolio also includes digital) will now decide whether to open a government investigation or to throw the ball back to the CMA for a phase II investigation.
• The fact that this will go forward for deeper investigation is not a big surprise and both Arm and NVIDIA have repeatedly warned that this would take some time.
• However, I think that NVIDIA’s placeholder response to the report indicates that the CMA’s view regarding its proposed remedies has been somewhat harsher than it was expecting.
• It is also harsher than I was expecting 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.
• Hence, I think that this issue is entirely manageable, but the CMA clearly does not think that NVIDIA’s proposals go far enough towards ensuring this outcome.
• On the plus side public support for the transaction from Broadcom, MediaTek, and Marvel goes a long way to reducing this concern (see here) leaving Qualcomm, Intel, and Microsoft as the main critics of the deal from whom I suspect the CMA received the weightiest responses.
• The net result is likely to be a deeper investigation, a longer delay to closing the transaction (not unexpected), and a rethink from NVIDIA in terms of the remedies that it puts in place to ensure Arm’s independence.
• 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.
• I still think that the deal can close but it remains to be seen how the remedies that NVIDIA puts through to keep the regulators quiet impacts 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 has just demonstrated.