Nvidia & Arm – The unthinkable pt. XI.

The FTC drops the hammer.

• The FTC is unique in being the only regulator so far to actively come out against the deal which I think represents the biggest setback for the Arm acquisition to date.
• The FTC has announced that it will be suing Nvidia (and SoftBank) in federal court to block the acquisition of Arm by Nvidia in a deal that is now worth around $80bn.
• This makes the FTC the first major regulator to actively come out against the transaction as the others such as the CMA (UK) and the EU have only raised concerns and continue to investigate.
• A suit implies that Nvidia has been unable to convince the FTC that its acquisition of Arm will not hurt the semiconductor industry leading to its belief that the deal should not go ahead.
• The FTC said that Nvidia will have “the means and incentive to stifle innovative next-generation technologies” and that it was acting to prevent these circumstances from coming to pass.
• This is a significantly stronger move than anyone else has made as this regulator is actively saying no while everyone else has merely voiced concern and then ordered more digging to take place.
• With these regulators, Nvidia still has the opportunity to demonstrate the merits of the acquisition, but it appears that the FTC has firmly closed that door.
• At the heart of the issue is the fact that the semiconductor industry is dependent on Arm’s intellectual property and having that IP controlled by a competitor raises a lot of issues.
• It is possible to mitigate these issues through good corporate governance and Chinese walls, but in this case, this is not enough for the FTC.
• Samsung is a good example of how conflicts of these types can be properly managed but there is a key difference between this example and Arm.
• Samsung is a world leader in smartphones but also has a division that sells memory and storage chips for mobile phones.
• Samsung’s handset competitors have been purchasing memory, storage, and displays from Samsung for years and would have stopped doing so in a heartbeat had there been even a whiff of unfair treatment.
• However, the key difference is that Samsung’s memory customers have somewhere else to go if they think Samsung is not treating them fairly which is not the case with Arm.
• One could argue that RISC-V is a viable alternative, but this argument only really holds for the very low end of the chipset market.
• This is because a user of RISC-V has to do an enormous amount of work on top of the RISC-V design to produce a chip that would compete with Arm’s high-end making this route impractical.
• Hence, for all intents and purposes there is nowhere else to go and if Nvidia was to treat them unfairly, leaving is not an option.
• This is what lies at the heart of the regulators’ concerns and it is not clear what Nvidia can do to alleviate those concerns now that one of them has effectively said no.
• The real problem here is that it will be impossible to get a definitive answer to this question until around 5 years after the deal has closed and the deal has been a smashing success with the critics having been proved wrong.
• 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 (or the other way around).
• The problem here is that this deal is now worth nearly $80bn to SoftBank thanks to the blistering rally in Nvidia’s share price since the deal was announced.
• If Arm goes back on the London Stock Exchange or even the Nasdaq, achieving a valuation of this magnitude will be almost impossible.
• This possibility is now starting to be reflected in SoftBank’s share price which fell by 7% intraday on Monday 6^th December and is 52% down from its 12-month high.
• This is why SoftBank will badly want to get this acquisition through.
• The deal can still 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.
• With the FTC being so clearly against the deal, the scale of the remedies required might destroy the value of the deal for Nvidia meaning that it ends up backing out.
• The regulators remain by far the biggest hurdle to getting the deal done as the FTC has emphatically demonstrated.