Nvidia & Arm – The unthinkable pt. XII (final edition)

An unthinkable transaction remains exactly that.

• It looks like Nvidia has thrown in the towel on the transaction to acquire Arm with the likely result now a relisting of Arm or possibly, the company staying as part of SoftBank.
• SoftBank is the big loser here as the rally in Nvidia’s share price has meant that the $30bn+ profit that it would have booked as a result of the sale has evaporated.
• Furthermore, it is extremely unlikely that the public market would afford Arm a valuation of around $70bn which is why SoftBank has always been keen to close with Nvidia rather than go for an IPO.
• Ultimately, the regulatory pressure proved to be too much for Nvidia which, according to the FT (see here), decided to abandon the transaction at a board meeting on Monday 7^th February.
• I suspect that it was the FTC’s suit to block the transaction (see here) combined with the unrelenting opposition from Qualcomm, Intel and Microsoft that tipped Nvidia over the edge.
• SoftBank gets to keep the $2bn Nvidia paid at signing plus a $1.25bn break-up fee, but this will be scant comfort for seeing a $30bn+ profit go up in smoke.
• Combine this with the hammering that Alibaba has taken over the last year, and it is not hard to see how 2021 will be a year that SoftBank prefers to forget.
• However, despite these woes, the pressure that SoftBank was under to raise money to shore up its balance sheet when it decided to sell Arm is no longer there.
• This means that IPO is not the only option available to SoftBank and given where Arm currently is, one option is to keep it.
• When SoftBank acquired Arm in 2016, the idea was to use Arm’s profitability to invest in building out its capabilities beyond smartphones and to become the processor design for everything.
• Once this had been achieved, the much higher level of sales would mean that the investments would be more than covered and Arm would be very profitable once again.
• At this point, the company could be returned to the market at a very healthy profit.
• The problem was that when SoftBank decided to sell Arm in 2020, the process of Arm’s development was only half complete meaning that the investments being made had not yet provided the promised returns.
• Arm remains a work in progress which is why I think that while returning it to the public market is the simplest solution, SoftBank will not realise anything like the value from the sale that it would have done had the sale to Nvidia closed.
• Given that there is no real pressure for SoftBank to sell down its assets at the moment, it might make more sense to hold onto Arm until its investment phase is over and its benefits are accruing in the form of expanding margins.
• This is particularly the case as Apple (and soon I suspect Qualcomm) has demonstrated that Arm is a viable proposition for almost any compute task.
• This means that the strategy of expanding Arm to cover many more use cases has merit and may be very successful.
• Hence, with a bit of patience, SoftBank may be able to book a profit similar to (or greater than) that which it would have had with Nvidia as opposed to a much lower one if it relists the company now.
• Hence, while an IPO is the easiest solution for SoftBank, it is not the only solution and I think it may decide to carry on owning Arm until such time it is ready to be a public company once again.
• This could take another 5 years or so, but I think the prospect of a $30+bn gain as opposed to break even may make SoftBank reconsider this option.
• Furthermore, the more valuations of the high-flying technology stocks correct, the more attractive this option will become.