Nvidia & Arm – Price maximisation.

Strategic investors will pay more.

• SoftBank is engaging in a strategy to maximise the price at which it can sell Arm with the hope that because strategic investors are very likely to be willing to pay a high valuation, the public market will also.
• Nvidia is in talks to become an anchor investor in the re-IPO of Arm which would see it become a strategic investor alongside Intel and I suspect Qualcomm (assuming a cessation of hostilities) and maybe Microsoft and/or Apple.
• I think that SoftBank intends to sell its entire position in Arm over time and having strategic investors will help soak up the shares as well as provide support to the valuation.
• The problem is that SoftBank expects to achieve a higher valuation than I think the market will bear.
• This is the quandary that SoftBank is dealing with as the deal for Nvidia to acquire Arm has put a number of around $80bn in Mr Son’s head in terms of what he wants to achieve in a sale.
• The problem is that even with Arm pretty much back the way it was before SoftBank bought it is not enough to justify this valuation in the public market meaning that SoftBank could end up with less than half the valuation it is hoping for.
• A rough straw poll of market participants puts the valuation of Arm at somewhere around $35bn which is only slightly more than what SoftBank paid for it.
• It is worth remembering that the original figure that Nvidia agreed to acquire Arm at was $33.5bn (ignoring contingent payments) and it was only a spectacular run-up in Nvidia’s share price that pushed the value of the deal to $80bn or so as the largest portion of the deal was to be paid in equity.
• This is why Nvidia has been arguing for an entry price of $35bn – $40bn (which I can just about manage) and has been baulking at paying what Mr Son wants to achieve.
• Nvidia and its peers would be coming into Arm as strategic investors as all of them are important licensees of Arm’s intellectual property (IP) which gives them a vested interest in seeing Arm prosper.
• For this reason, these sorts of investors are likely to be willing to pay more for Arm than grubby investors (like me) who only look at the company’s capacity to generate net cash flow over an explicit period of time and the risks that are attached to those cash flows.
• I suspect that Nvidia will be willing to pay a higher price than the mooted $35bn-$40bn but I suspect not a lot more.
• In a way, SoftBank is trying to make an argument to authority by using the example of strategic investors who know the company far better than anyone else being willing to pay a higher valuation to convince the public market to do so.
• I have doubts whether or not this will be successful, but Nvidia is currently enjoying a Midas touch moment and so maybe some of this magic will rub off on Arm if Nvidia becomes a large investor.
• This would of course go hand in hand with commentary about how this investment would allow Nvidia to advance the development of advanced AI silicon in the hope that the market will begin to view Arm as part of the generative AI story rather than just a processor IP company.
• This could cause some of the AI magic to rub off on Arm but it is important to remember that we are in the middle of a generative AI bubble (see here) and at some point, that bubble is going to burst.
• Consequently, I think it would be better for Arm to stay as an IP processor company rather than enjoy a short-lived run-up followed by a collapse when generative AI fails to live up to the expectations that are currently being set for it.
• In the long-term, a slow steady improvement in the share price over many years looks far better than a rollercoaster that can put a blot on a company’s reputation for 10 years or more.
• Unfortunately, I don’t think that Mr Son agrees.